Eye on the long-term prize with Disney shares

Eye on the long-term prize with Disney shares


Key Point Inside this Alert:

  • We are boosting our price target on Walt Disney (DIS) shares to $130 from $120.


Last night Walt Disney (DIS) reported June quarter results that missed expectations modestly on the top and bottom line, taking some wind out of the shares in after-market trading. To be fair, Disney shares have ascended quickly quarter to date as it became clear that it would be the one to acquire the TV and movie assets at 21st Century Fox (FOXA). That melt up put DIS shares in the position to having to deliver upside relative to expectations to justify the share price move over the last five weeks, but those new catalysts won’t begin to fire for Disney for a few quarters.

I continue to see many positives associated with that transaction, which include adding the vast Fox content library to Disney’s existing one that spans its historical characters as well as Marvel, Star Wars, and Pixar. As the transaction closes, Disney will likely reveal its strategy to integrate the properties, but odds are it will focus on the existing Disney strategy to leverage tentpole franchises across its various businesses like we are seeing with Marvel, Star Wars and Pixar across its parks and consumer businesses. Believe me, there is no reason to complain about that strategy given its success; if anything, the Fox acquisition allows Disney to double down on that strategy.

The Fox assets will also give a positive shot in the arm to Disney’s international plans given Fox Networks Group International’s 350 channels that reach consumers in 170 countries, while Star reaches 720 million viewers a month across India and more than 100 other markets. That library also shores up Disney’s competitive position for the expected launch of its own streaming services in late 2019, which the financial media has come to call “Disflix”. My view remains that if Disney is successful in deploying its streaming service — a service that will tap into a vast content library and is expected to be priced below Netflix’s (NFLX) streaming service — investors will have to revisit how they value the company, especially if the streaming service becomes a meaningful part of Disney’s sales and profit stream.

So, if one is focused on the rear-view mirror that was the company’s 2Q 2018 quarterly results I can understand some disappointment with the top and bottom line misses, but to me, it is the coming quarters where the action is when it comes to Disney. No doubt, there will be challenges along the way, but over the coming 12-24 months, the scope and scale of Disney will be far greater with solidified competitive moats around its business. For that reason, I am nonplussed by the company’s June quarter results and while we recognize the need to be patient with Disney given the timing of these two key transformative events, we have a vibrant array of films hitting the box office in 2019 that include Captain Marvel, Dumbo, Avengers, Aladdin, Toy Story 4, The Lion King, Artemis Fowl, Jungle Cruise, Frozen 2 and Star Wars: Episode IX.

While I we will certainly be able to dig far more into the details as the Fox acquisition closes, Disney has shared that it expects to achieve $2 billion in cost-related synergies associated with the Fox transaction and that has us bumping our long-term price target on DIS shares to $130 from $125. As management shares potential revenue synergies and updates its cost savings prospects as well as simply runs the existing business leveraging its 2019 content pipeline, I’ll look to revisit our price target as needed.

  • We are boosting our price target on Walt Disney (DIS) shares to $130 from $120.


Disney continues to execute as it preps its streaming services

Disney continues to execute as it preps its streaming services


After Tuesday’s market close, Content is King investment theme company Walt Disney (DIS) reported stronger than expected March quarter results with EPS besting expectations by $0.14 per share. For the quarter, Disney reported EPS of $1.84 vs the consensus forecast of $1.70 and the $1.50 delivered in the year-ago quarter, which means year over year EPS improved 23%. While better than expected revenue of $14.5 billion for the quarter, up 9% year over year and ahead of the expected $14.1 billion for the quarter, aided the EPS beat so too did the 5% decline in the outstanding share count and the lower tax rate (20.7% vs. 32.3%) in the year-ago quarter.

That revenue and buyback combination offset overall operating profit margin declines that reflected softer margins at the Media Networks (42% of sales, 49% of operating profit) and Consumer Products & Interactive Media (7% of sales, 8% of operating profit) despite solid margin improvement at both Parks & Resorts (34% of sales, 23% of operating profit) and Studio Entertainment (17% of sales, 20% of operating profit).

Sifting through all of the segment results and assessing the below the operating line influences, we find that year over year Disney’s operating profit rose 6% with the business spitting out free cash flow of $3.5 billion, up nearly 50% year over year.


More high profile movies are on the way…

It’s pretty much business as usual for Disney, and during the earnings conference call CEO Bob Iger shared an upbeat outlook across the Studio Entertainment and the Parks and Resorts businesses. More specifically for the Studio Entertainment business, on the heels of the newest Avengers film that is breaking box office records, Solo: A Star Wars Story, is generating a lot of interest and strong buzz ahead of its Memorial Day weekend opening. Disney will follow that with a dozen high profile movies over the next 18 months, including Incredibles 2, Ant-Man and the Wasp, Ralph Breaks the Internet, Mary Poppins Returns, Captain Marvel, Dumbo, Avengers 4, Aladdin, Toy Story 4, The Lion King, Frozen 2 and Star Wars Episode IX.


…that will drive Disney’s other businesses

With Disney merging its Parks & Resorts business with its Consumer Products business, the new combined entity stands to benefit from the coming onslaught in content from Studio Entertainment across its licensing business as well as new attractions at the Parks. Those new attractions include the Toy Story Land that’s about to open in Florida next month, the one that just opened in Shanghai, updated cruise ships, Star Wars: Galaxy’s Edge will open in both Disneyland and Disney World by the end of calendar 2019 plus multiple hotels around the world and new lands in the Paris and Tokyo parks. I see that as more reasons for people to return to the Disney Parks in the coming years.


ESPN Plus has launched

Turning to ESPN, the company recently launched its ESPN Plus Service, a streaming sports service, and while it was mum on details given the brief time it’s been in the marketplace, management said it was encouraged by initial results. The team also noted that it recently inked a deal to add UFC content to the Plus service and that it will continue to both invest and license sports content for both live and non-live sports.


And about that pending transaction with FOX

In terms of the pending transaction with 21st Century Fox (FOXA), Disney shared that it is still deep in the process, including on the regulatory front, and it could not add more at this time. Even so, Iger went on to share some high-level synergies to be had, particularly from a content side when describing ESPN Plus, Disney’s own direct to consumer streaming service that will launch in late 2019 as well as Hulu of which it will own some 60%. As part of those comments, Iger also answered a lingering question over that Disney branded streaming service – that it will be anchored by Disney, Marvel, Pixar and Star Wars content.

In recent days, Comcast (CMCSA) appears to have thrown its hat back into the ring for the Fox business. I’ll be watching the developments, and what it means for a Disney-Fox combination, which in my view would serve to improve Disney’s content and character library, serving to quickly build a formidable set of direct to consumer streaming services. Next to this is we are waiting to see if the U.S. government approves AT&T’s (T) acquisition of Time Warner (TWX).

Viewing these pending transactions together, we continue to see a transformation when it comes to content creation as well as transmission. I see it as a coming together of our Connected Society investing theme with Content is King to form a new theme in and around our growing digital lifestyle. More on that as I flesh that thought out further in the coming weeks.


Bottom line – Disney is doing what it does

To sum it up, Disney is doing what it does – generating tentpole franchise content at the box office and then using that same content to increasingly fueling its consumer products and parks business. As Disney continues to do this, in the coming quarter Disney will look to expand its streaming services, and if successful those subscription businesses are successful, it will add greater visibility and predictability to the company’s revenue and earnings stream as well as cash generation that will be used to buyback shares and re-invest in the company’s businesses. Should that come to pass, Disney will be tapping into our Connected Society investing theme in a way similar to Netflix (NFLX) and I suspect investors will look to re-think valuation multiples for the shares vs. the current multiple of 14.5x 2018 earnings that are poised to grow 21% year over year.

  • Our long-term price target on DIS shares remains $120.



Remaining Opportunistic as the Market Gets Cautious

Remaining Opportunistic as the Market Gets Cautious

After taking the prior week off on my sojourn to Singapore to present at INVESTFair 2017, I’m back. Take it from me, not only was the food fantastic as I put on several extra pounds, but Singapore is far ahead of us when it comes to our Cashless Consumption investing theme. Tematica’s Chief Macro Strategist, Lenore Hawkins, and I talked about this on our Cocktail Investing podcast recently, but that level of activity keeps us bullish on USA Technology (USAT) shares on the Tematica Select List.

Earlier this week, we posted comments on Content is King player Disney (DIS)’s recent announcement it will look to shun Netflix (NFLX) and enter the streaming content market gun, rather than remaining a content bullet, and scaled further into shares of Food with Integrity company Amplify Snacks (BETR). We also sent over out latest high-level thoughts on the market in this week’s Monday Morning Kickoff – if you missed it, you can read it here.

As a quick recap since our last Tematica Investing, we’ve seen a far more cautious attitude enter the market following the back and forth with the U.S. and North Korea. At the same time, we’re also seeing some fatigue as even solid earnings beats like the one yesterday from Home Depot (HD) are not having the usual or expected stock price reaction. While we could toss it up to the fact that we’re entering the back half of August — one of the traditionally slower times of the year as people sneak it that last round of summer vacation — there could be something else going on.

Our view here at Tematica is investors are taking stock of not only the vector and velocity of the domestic economy, but also the growing political unease and are looking ahead to what’s coming down the barrel in September: the unveiling of President Trump’s tax reform, Congress dealing with the debt ceiling and potentially the start of the Fed’s balance sheet unwinding. All that during what has historically been one of the worst months for the domestic stock market. We’d add in that September is full of investor conferences, and after the usual August quiet, we suspect investors will be listening closely to these upcoming company presentations to fine tune back-half of the year expectations.

So, while we’ve seen a bit of a rebound in the market so far this week following last week’s sell off, we’re inclined to see the near-term waters remaining a tad choppy. Let’s remember, trading volumes tend to be a tad light this time of year and that can exacerbate the swings in stock prices. The net result is that we will tread carefully in the coming weeks, but we will still be opportunistic like we were with the buying of additional Amplify Snacks (BETR) shares yesterday, a move that reduced the overall cost basis on the Tematica Select List.


Checking in on July Retail Sales – Looks Great for Amazon, Alphabet, UPS and Costco

As mentioned in this week’s Monday Morning Kickoff, there is a modest amount of economic data to be had this week, including yesterday’s July Retail Sales Report. Overall it was a positive report with core retail sales, which exclude auto, gasoline station, building materials, and food services and drinking places sales, up 0.5 percent. Moreover, the June decline of 0.1 percent was revised to an uptick of 0.1 percent. Digging into the July report, we found a pick-up in digital commerce, which likely reflects the Back to School shopping season as well as ongoing efforts by Amazon (AMZN) and others to grab consumer wallet share. Let’s remember that Amazon’s own would-be shopping holiday – Prime Day – fell in early July and likely was partly responsible for the strong rebound in digital shopping during the month.

Year over year, Nonstore retailers (Commerce Dept. speak for digital commerce sales) rose 11.5 percent in July, once again making the category the strongest performer. We see this as boding well for not only our Amazon shares but also for United Parcel Service (UPS) — those packages have to get to your front door somehow — as well as Alphabet (GOOGL) given its Google Shopping service as well as the company’s Search business.

Getting back to the July Retail Sales Report, most other categories were positive for the month, save for Sporting Goods, Electronics & Appliances and Department Stores. The month’s data helps put some understanding around Dick’s Sporting Goods (DKS) slashing its 2017 outlook, but we also think that company is poised to hit the headwind aspect of our Connected Society investing theme following Nike’s (NKE) recent linkage with Amazon. Said another way, we continue to see a bleak outlook for traditional brick & mortar retailers as consumer products and apparel companies, especially branded ones, embrace Amazon and other digital logistic businesses.

Finally, the July Retail Sales Report put some much-needed context around Costco Wholesale’s (COST) July sales report. As a reminder, Costco reported its July sales increased 6.0 percent in the US, and 6.2 percent across the entire geographic footprint. That compares to just a 2 percent increase for General Merchandise stores as well as Grocery vs. July 2016. Additionally, Costco continued to open up new warehouse locations during the month, reaching 736 locations compared to 729 at the end of April. Paired with the recent membership fee increase, this expanding footprint should be a positive impact for the all-important and high margin member fee revenue stream.

Our price target on Amazon (AMZN) shares remains $1,150.
• Our price target on Alphabet (GOOGL) shares remains $1,050.
• Our price target on United Parcel Service (UPS) shares remains $122.
• Our price target on Costco Wholesale (COST) remains $190.


On Deck – Earnings from Applied Materials

Even though we are in the dog days of summer, we still have a few companies left to report their quarterly results. One of them is Applied Materials (AMAT), and that event happens later this week. Following a bullish report from competitor Lam Research (LRCX), we expect solid results to be had. Despite the move lower over the last several weeks, the outlook for semiconductor capital equipment remains bright given the expanding reach of chips into a variety of end markets as well as demand for next-generation memory and display solutions.

This includes the same currently capacity-constrained organic light emitting diode display market, which is seeing rising demand dynamics from the smartphone, TV, wearables and automotive industries. And yes, this same demand function that is benefitting the shares of Universal Display (OLED) on the Tematica Select List. On Applied’s earnings call we’ll be listening for equipment order as well as overall demand tone for this disruptive display technology to determine as best we can how many quarters

One final demand driver that should result in a positive quarter for AMAT — ramping capacity in China. The potential wrinkle with this is we’ll need to be mindful of exchange rates and the impact on the company’s business, but all in all, we suspect the company will deliver a solid quarter with an upbeat outlook.

On a side note, odds are Applied will discuss factors that are driving chip demand and therefore incremental demand for its semiconductor capital equipment. Likely subjects include data centers, the Internet of Things, the Connected Car and other markets. The one we’ll be listening to given the Tematica Select List position in AXT Inc. (AXTI) and Dycom (DY) will be the smartphone market — which is entering its seasonally strong part of the year — and any commentary on 5G network deployments. Other 5G commentary points to a pick-up in testing by Verizon Communications (VZ) and AT&T (T) as well as Apple being granted a license to test 5G wireless services. Both of these developments reinforce our bullish view on both AXT and DY shares on the Tematica Select List.

Our price target on Applied Materials (AMAT) remains $55.
• Our price target on AXT Inc. (AMAT) remains $11.
• Our price target on Dycom Industries (DY) remains $115.


Housekeeping Items

There are no housekeeping items this week, other than to remind you to check TematicaResearch.com as we post more thematic and macro commentary in the coming days. And while the Cocktail Investing podcast is on hiatus until the last week of August, feel free to revisit some of the past episodes here.




The Tematica Take on Disney’s Pending New Streaming Service

The Tematica Take on Disney’s Pending New Streaming Service

We expect Disney shares are likely to trade sideways over the next several weeks as the market continues to digest the recently announced moves by the House of Mouse. We, on the other hand, continue to see our Content is King investment theme providing significant tailwinds to the business, and as such we’re suspending our stop-loss and will instead look to use further share weakness to improve our cost position.


Our Content is King investment theme has been getting plenty of attention over the last week. It started with Disney (DIS) announcing it would look to sever its relationship with Netflix (NFLX) as it plans to launch its own streaming services for ESPN and Disney content in 2018 and 2019, respectively. During the company’s 2Q 2017 earnings call, in which it discussed its better than expected quarterly results, it also offered some insight into its plans around this planned streaming service:

  • The new Disney content service will become the exclusive home in the U.S. for subscription video-on-demand viewing of the newest live action and animated movies from Disney and Pixar, beginning with the 2019 slate, which includes Toy Story 4, the sequel to Frozen, and The Lion King from Disney live-action, along with other highly-anticipated movies.
  • Disney will be making a substantial investment in original movies, original television series, and short form content for this platform, produced by our studio, Disney Interactive, and Disney Channel teams.
  • Subscribers will also have access to a vast collection of films and television content from our library.

As part of this move, Disney increased its ownership position in BAMTech, but came up short when it came to specifics about the launch of the planned service. You’ll notice what was not discussed, which was Disney’s Marvel and Lucasfilm properties, both of which are staples at Netflix, including several Marvel TV properties like Daredevil, Jessica Jones, and others. We chalk this up to Disney still figuring it out as it goes, but we expect more details to emerge in the coming months.

We understand Disney’s move for greater control over the distribution of its content as consumers increasingly shun cable and satellite bundles in favor of embracing the cutting the cord aspect of our Connected Society investing theme to watch what they want, where they want and when they want. Obviously, this move by Disney adds a layer of investment and uncertainty into the mix as it raises many questions at a time when the company is shy on details. That said, we know Disney is extremely careful in making its moves and usually has a well thought out, cohesive plan that leverages without sacrificing its content.

As we and others digest this initiative, with no major catalyst pending until the company resumes its run at the box office later this year, we expect Disney shares are likely to trade sideways over the next several weeks. We do suspect Disney will opportunistically use its share buyback program to its advantage in the coming weeks, which should help support the shares in the coming weeks. On the June quarter earnings call, Disney shared it had repurchased 22.3 million shares for $2.4 billion during the April-June 2017 period. Over the last nine months (let’s remember Disney is one of those “funny fiscals” that ends its business year in September), the company has repurchased 64.3 million shares for approximately $6.8 billion and shared it intends to end the current fiscal year repurchasing $9-$10 billion. Some quick sandbox math tells us that means Disney could buy back $2.2 to $3.2 billion worth of stock in the current quarter. Given the fall off in the shares of late, we’re inclined to think such activity will skew toward the higher end of the range.

In keeping with our Content is King theme, we recognize the vast library of characters and content under the Disney hood. As the company returns to a more normalized presence at the box office beginning in the December quarter and continuing through 2018, we’ll be patient with the shares.

We’ll be pulling the lens back on several Content is King announcements, including Netflix buying comic-book company MillarWorld as well as inking an exclusive deal with the creator Disney/ABC’s Scandal Shonda Rhimes, and Facebook (FB) angling to attack both the TV advertising spending stream and Alphabet’s (GOOGL) YouTube at the same time. We’ll have our thematic thoughts on what these moves and others mean for our Content is King theme on TematicaResearch.com shortly.

  • Our price target on DIS shares remains $125.
  • We will suspend our $100 stop loss at this time, as we’re inclined to use any incremental weakness to improve our cost basis in the position.


PwC Data Confirms Our Content is King Investing Theme

PwC Data Confirms Our Content is King Investing Theme

We’ve touched on this aspect of our Content is King investing theme before, but nothing like data from PricewaterhouseCoopers to confirm it and the theme itself!

Box-office markets over the next few years are expected to grow more quickly abroad than in North America, where receipts have been relatively flat and are forecast to expand only modestly. That dynamic already is changing the way movies get made in Hollywood, as studios focus on big-tent productions like superhero epics that play across borders, or find story lines they know will fly in censorious countries.The Wall Street Journal used analysis by PricewaterhouseCoopers to give a fuller picture of the five fastest-growing box-office markets around the world.

Source: A Look at the Five Fastest-Growing Markets for Movies – WSJ

More Robots To Help The Obesity Trend

More Robots To Help The Obesity Trend

Slowly but surely we learn of more tasks around the house, particularly those annoying ones that we’d like to put off if we can, are being overtaken by robots. While this may reduce tasks in and around the home, it does have us wondering more and more about the future of civilization and whether Disney’s Pixar got it right with WALL-E.

While we aren’t living in any sky-rise Jetsons apartments just yet, home automation has come long away since its humble beginnings. Dishwashers have eased the tedious task of hand-washing dishes, dryers have practically killed the clothesline, and when was the last time you saw someone actually change the channel by hand (or watch television on a TV)?


So what’s next? Home technology has a long way to go before it catches up with some cinematic visions of the future, but these robotic servants could spell the end of a few other household chores.

Source: 5 Household Robots That Will Do Annoying Chores For You | Digital Trends

New  FDA-approved weight loss device sucks food straight from your  stomach

Whenever you see and expanding pain point, and obesity is clearly one, there tend to be all sorts of companies putting forth solutions. In looking at this potential solution to the Fattening of the Population, we have to wonder if its a device that will truly help or one that enables? Would it have helped all those people that WALL-E encountered near the end of his self titled movie from Disney’s Pixar?

Get ready to lose your lunch. A new device that drains a portion of a person’s stomach contents after every meal has just won approval from the U.S. Food and Drug Administration.The AspireAssist device is intended for obese people at least 22 years of age who have not been able to lose weight through other approaches, excluding surgery. The device was developed by King of Prussia, Pennsylvania-based company Aspire Bariatrics.

There is, of course, a bevy of possible things that can go wrong while wearing the device. The FDA statement warns of side effects including “occasional indigestion, nausea, vomiting, constipation and diarrhea,” as well as side effects from the placement (or removal of the tube, including symptoms ranging from sore throats to bleeding and pneumonia, and irritations or conditions around the valve on the outside of the body.

Source: The FDA-approved a weight loss device that sucks food out of your stomach

China will be bigger for the movie box office in 2017 than the US 

China will be bigger for the movie box office in 2017 than the US 

Whether its characters from Disney’s Marvel, Star Wars or Pixar stable, or even DC’s own Batman and Superman, people will flock to the movies to quench their content thirst. Increasingly the international box office is becoming a bigger and bigger factor in movie decisions. Some film, like Expendables 3, are being made solely because of foreign demand, and the same goes for streaming content from Netflix and Amazon. What this tell us is content is truly king, but it also means content companies are likely to pivot to satiate local preferences. 

China — not the U.S. — is projected to be the leader in box office revenue in 2017, according to PricewaterhouseCoopers.If true, it will mark the first time that the U.S. has not been the top revenue driver in an entertainment and media segment. The Chinese box office is expected to generate $10.3 billion next year, while the U.S. will be at $10.1 billion. By 2020, the Chinese box office will reach $15.1 billion versus just $11 billion in the U.S.

Source: China will be bigger for the box office than the US next year: PwC