Disney (DIS) reported better than expected 4Q15 earnings, a great relief to investors following the controversial 3Q 15 report in August that send DIS and other media stocks into a spiral of declines ranging from 20-30% in just a few weeks.  The issue in August was a lowering of guidance due to foreign currency hedges expiring and a reduction in the subscriber base at ESPN.  IT was the ESPN news that caused trouble for DIS and media stocks as it ignited fears that cord cutting and cord shaving had reached a tipping point.  Given the reliance of TV networks and cable and satellite providers have on subscription fees and advertising via ratings, accelerating subscriber losses would quickly damage the profitable and heretofore steadily growing TV business.

Northlake felt that investors overreacted to the ESPN news because we did not see a massive acceleration in cord cutting/shaving that was implied by the plunge in stock prices.  Furthermore, we believed that confusion surrounding Nielsen data probably led Disney to include a couple of years of sub losses into one guidance update.  With Disney making no further changes to their ESPN guidance and stating that they have seen no pickup in sub losses recently, investors are feeling a lot better about this important asset for DIS that represents around 20% of the company’s financial profile.  Also comforting investors has been the latest set of earnings reports from satellite, cable, and telco companies that show no acceleration in sub losses.

With less concern about the imminent demise of ESPN’s economics, investors are free to focus on many other positives at DIS.  The new Star Wars movie hits theaters in December and all indications are it will be a smash hit  Early consumer product sales and interest in the video game produced by Electronic Arts are positive signs.  DIS can also look forward to the opening of ts resort in Shanghai next spring.  The resort will produce a loss in in its first year but offers big long-term promise on its own and to help build interest in Disney properties in China.

Other positives emerging from the latest report include better than expected programming expense guidance for 2016 for ESPN, improved advertising growth at ESPN and ABC, and a continued aggressive pace of share buybacks to utilize the company’s excellent balance sheet.

DIS shares have recovered all but 3% of August’s 20% plunge.  Northlake sees the potential for DIS shares to rise another 10-15% over the next six months.  The big upside may be in the rear view mirror after the shares doubled in less than three years form our initial purchase but we think this quality company is worth an investment for at least a little while longer.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  DIS is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.