The Walt Disney Company (DIS) was recently in the news for raising its offer to purchase most of 21st Century Fox (FOXA) for about $71 billion in cash and stock. This tops an unsolicited offer from rival company Comcast Corp, (CMCSA) and escalating the bidding war for the well recognized media properties that Fox owns. FOXA shares jumped 7.25% yesterday on the news.
Rupert Murdoch, executive chairman of 21st Century Fox, is certainly happy about the deal. He said in a statement that Fox “firmly believes that this combination with Disney will unlock even more value for shareholders as the new Disney continues to set the pace at a dynamic time for our industry.” He remains convinced that the combination of “21st Century Fox’s iconic assets, brands and franchises with Disney‘s will create one of the greatest, most innovative companies in the world.“
But the deal is not final yet. Originally Fox’s board of directors was scheduled to vote on the Disney buyout on July 10th, but they have decided to postpone that meeting to give Comcast another opportunity to extend the bidding war. FOXA is in a really good position right now, and it obviously wants to be sold at the highest price possible for its shareholders.
Whether it be the Star Wars franchise, Pixar’s animation, or the Marvel universe, Disney has shown time and time again that it knows how to maximize brand awareness and capitalize on entertainment franchises. According to Thompson Reuters stock reports, out of 22 analysts covering DIS, the average 12 month target price is $135 per share, which is 26% higher than today. Strong fiscal second quarter returns reiterate a buy rating by most analysts. Disney’s family of parks and resorts are what lead the strong results so far in 2018. Its studio entertainment also reported stellar numbers. Apart from a bid to purchase Fox, Disney’s CEO Bob Iger has made it a top priority this year to launch a new “direct to consumer” digital service.
As an investment, DIS shares have grown a lot over the past. Its current return on equity figure is at 23.4% according to Argus market research. Disney’s top line revenue increase 9% year-over-year to $14.55 billion, driven by growth at Parks and Resorts, Studio Entertainment, and its Media Networks. “Segment operating income rose 6% to $4.2 billion,while the segment operating margin narrowed by 80 basis points to 29%. Adjusted EPS attributable to Disney rose to $1.84, up 23% from $1.50 in fiscal 2Q17. Second-quarter adjusted EPS excluded a$0.09 net benefit from the new tax law, a $0.02 insurance benefit related to litigation, and a $0.01 charge for restructuring and impairment expense. GAAP diluted EPS rose 30% to $1.95.”
Disney is expected to reach an EPS of $7.67 by 2019 fiscal year, it is reasonable to apply a 15x multiplier which would put the fair value of the stock to be $115 per share. 15 times forward earnings is not expensive given today’s elevated stock market conditions. Disney is currently trading at around $107 so now would not be a bad time to pick up some DIS. The quarterly dividend payments are nice as well for income investors. The 3% annual dividend provides shareholders with cash return as well as capital appreciation. I purchased DIS shares five years ago. It has gone up a lot since then but I think there is still more opportunity to expand for the company. For a buy and hold strategy I would suggest looking into the Walt Disney Company.
This author currently owns 30 shares of DIS as of writing this post.