Disney (DIS) reported mixed results with the headline EPS number getting a big boost from a tax rate well below estimates.  Parks and Resorts was the positive standout with 13% revenue growth accompanied by operating leverage that boosted operating income growth to 21%.  The rest of the company’s divisions all reported flat to lower year over year revenue and operating income.  This has been a persistent pattern for Media Networks and Consumer Products for the last two years.  The Studio results are volatile due to the timing of film releases and there is no concern for this segment beyond the tough comparisons given the unrivaled intellectual property lineup of Star Wars, Pixar, and Marvel.

The investor debate surrounding DIS has calmed considerably over the past few quarters, allowing the shares to recover some of the losses that began in the summer of 2015 when the company first announced subscriber losses at ESPN.  Nonetheless, the shares have been a long-term laggard amid growing concern about the company’s ability to sustain growth given the potentially declining fortunes of its Media Networks in a world of cord cutting and cord shaving.

This provides a good lead into Northlake’s main takeaway from the quarter:  the investor debate has shifted to the company’s strategies for dealing with a world where TV is on demand and delivered direct to the consumer over the internet rather than through a cable or satellite company.  The company’s strategy is to gradually shift toward a direct to consumer strategy supported by the acquisitions of BAMTech and the Fox entertainment assets. BAMTech is providing the technology to deliver apps and over the top TV services built upon the bulked up intellectual property that now adds Fox.

While there has been some improvement in ESPN subscriber losses and a new cycle of affiliate fee negotiations with cable and satellite companies can improve results of the Media Networks segment over the next year or two, the long-term outlook remains quite challenging for these businesses.  Investors are still worried but seem to be giving the company the benefit of the doubt as it develops its direct to consumer strategies.  This is a big positive change for the prospect of DIS shares.

Northlake maintains its concern about the success of Disney’s direct to consumer strategies, especially the cost to build the subscriber base via marketing and programming investment.  However, these concerns are offset by an underappreciated bull case in theme parks.  Parks and Resorts steady growth as the rest of the company has stagnated leaves this division at 1/3^rd of profits, its highest level ever.  This provides great support for the stock because other theme park and live entertainment stocks trade at significant premium valuations compared to DIS.

The bottom line is we continue to give DIS shares the benefit of the doubt trading at just 14X next year’s earnings, a cheap level on a historic or relative basis for a company of Disney’s quality.  Upside may be limited for now but a lift to a still inexpensive 16X would bring the stock up $120, a 15% gain from current levels.

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.