Disney: The Mouse will roar again

Disney reports earnings today and we expect good numbers. In many ways Disney is hitting on all cylinders now. We expect them to beat numbers thanks to Black Panther and Theme parks but we still expect ESPN to be under some pressure as they switch to an OTT model.

The Good: The Disney movie business has never been better. They are doing amazing and they still have so many good movies to go for 2018 and 1019. Will Black Panther and Avengers making records now Solo seems to be on this huge blockbuster track too. They are dominating the box office and breaking every record. On top of this they are proving that their main Marvel and Star Wars franchise continue to grow with new characters and directions and are bigger than ever. The box off drives everything at Disney and this has never been better!

Theme parks are doing well as travel grows led by Asia. With the China Theme park growing the Disney appetite in China the upgrades to US Disneyland’s looks epic. I can't wait for Star Wars land in 2019 and the lines will be ridiculous. Theme park and cruise business continue to churn profits and can grow forever with a global audience with more income and mobility. This is a very string part of the business with lots of upside. This is also a cash generating business.

Other Investments like Hulu and Vice continue to gain traction as OTT offerings and the BAM tech acquisition is paying off already with a great new ESPN app with lots of potential. The BAM technology Is great and the design and function of the new app makes it the Netflix of sports. As more content is added we see this app being a great global success. We know they are working on Cricket in India and soccer, the global focus makes ESPN very attractive as an OTT app. With World Cup starting the interest in sports globally continues to grow and Disney will continue to be the leader with ESPN> They just needed a good app and now they have one.

The Not as Good: ABC and ESPN still have legacy cable declines to deal with. To ABC’s credit the Rozanne reboot has worked and got them up the charts but broadcast TV is not a growth business anymore. Most importantly the cable companies are doing nothing to stabilize the decline in subs and ABC needs to follow the CBS rout and become OTT too. Cable will continue to lose subs forever as they are doing nothing. This is a decent business but not growing. ESPN is another animal. First they have done the app and now over time shift more and more distribution to the app so people pay the $5 a month. This is being helped by deals like UFC announced today which will get niche viewers who want their favorite sports or teams off the beaten path. Until Disney controls the digital rights, Big ESPN ABC sports have to have a cable login. It will be some time before this changes so we see ESPN doing ESPN+ deals for everything else.

Comcast is a big downer, they have a huge amount of different assets but all they want to do is mess up the Disney deal with Fox. His has held back Disney stock as people fear Disney will overpay in a bidding war. Iger is very shrewd and Fox is way better off with Disney. But we think Disney should walk away if Comcast bids higher. Disney will make $1.5 bil and still have most of what they need for their OTT Disney app. Disney doesn’t need Fox but Fox needs Disney. Also the tax hit to the Murdoch family would be huge in a cash deal. Then fox Comcast will be caught in regulatory hell and we don’t see the synergies other than cutting up fox and selling it off. I don’t think Murdoch wants this. Clearly Comcast shareholders are the losers here already. The leverage and cost to Comcast makes little sense. Either way this is holding back Disney until it is resolved. We think Disney will win either way.

Disney trades at a very reasonable valuation with a huge global brand and good growth ahead. We long Disney for the firm, clients, and ourselves.

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Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., a SEC registered investment advisor with approximately $725 million in assets under management. Gerber Kawasaki clients, firm and employees own positions in Disney and Fox. Readers shouldn’t buy any investment without doing their own research to determine if the investments are suitable to their situation. All investments have risk. Please contact us if you have any questions.