Earnings miss is a ‘temporary’ setback, and no reason to change the long-term view, analysts say
Shares of Walt Disney Co. are suffering the biggest post-earnings selloff in four years, but some analysts say that just makes them easier to love, as the longer-term focus on its Disney+ streaming video service provides a good reason to remain bullish on the media and entertainment giant.
Disney reported late Tuesday a fiscal third-quarter profit and revenue that were well below expectations, as the acquisition of assets from 21st Century Fox led to a “complicated” quarter that made it difficult to make accurate financial projections.
“In our view, the investment thesis is the same and if we liked the stock before earnings, we love it on any weakness.”Analyst Alexia Quadrani at J.P. Morgan
The stock DIS, -4.94% sank 4.8% in afternoon trading Wednesday, to put it on track for the sixth loss in seven sessions since the July 29 record close of $146.39. It was the biggest decliner in the Dow Jones Industrial Average DJIA, -0.09% , with the price decline shaving about 47 points off the Dow’s price, which swung to a gain of 10 points.
This marks the third straight quarter, and sixth in the past seven, in which the stock fell on the day after earnings were reported. And Wednesday’s selloff is headed for the worst post-earnings performance since it tumbled 9.2% on Aug. 5, 2015.
But the stock was still up 23.1% year to date, to outperform the SPDR Communications Services Select Sector exchange-traded fund’s XLC, +0.12% 19.3% rise and the Dow’s 11.6% gain.
Wall Street analysts were unfazed by the miss, as the 24 analysts surveyed by FactSet, 17 (71%) kept their ratings at the equivalent of buy, and the rest maintained their neutral views. The average price target was $155.60, up from $154.62 at the end of July.
Analyst Alexia Quadrani at J.P. Morgan kept her overweight rating and $150 price target on the stock, saying “there are bound to be some hits and misses” given all the moving pieces between the newly acquired Fox and ahead of the Disney+ launch in November. She believes any pullback in the stock after earnings provides a “great buying opportunity” for a “powerful content play.”
“In our view, the investment thesis is the same and if we liked the stock before earnings, we love it on any weakness,” Quadrani wrote in a note to clients. “We believe the focus and upcoming catalyst for shares remains the launch of Disney+ (and its announced bundle with ESPN+ and ad-supported Hulu at an attractively priced $12.99/month) and these results don’t change our favorable outlook on the [direct-to-consumer] products and expectations for rapid growth in subscribers.”
Bank of America Merrill Lynch analyst Jessica Reif Ehrlich reiterated her buy rating and $168 price target, despite the “significantly greater than expected dilution” from the 21Century Fox (21CF) deal and weaker results at the parks, experiences and consumer products business.
“We view both of these items as temporary setbacks, that do not alter the long-term trajectory of the company,” Ehrlich wrote. She said her price target, which is 24% above current levels, reflects a “well justified premium valuation” because of Disney’s best-in-class assets, global exposure and the “strategic enhancement” from the 21CF purchase.