Disney (DIS) reported a strong 4Q18 as it wrapped a good fiscal year financially and an eventful one strategically.  For the year, revenue grew 8%, the best rate of growth since 2015.Opeting income grew 6% but adjusting for losses at recently acquired BAM TECH and ongoing losses at Hulu, growth would have been several percentage points higher.

These strong results came amid several years of fear about the outlook for ESPN as skinny bundles and cord cutting led to declining subscribers as the company is locked into massive, fixed, long-term sports rights contracts.  The company should be able to pass through rising sports rights on a per subscriber basis as it has renegotiates deals with various cable and satellite distributors in 2019.  Theme Parks and the Film Studio continue to perform incredibly well.

DIS shares have been among the market’s better performers recently, hovering very 2018 and all-time highs.  The outlook from here is trickier, however, as the company is about to close on its acquisition of assets from 21^st Century Fox and launch its direct to consumer Disney Plus service.  Each of these items is dilutive to EPS and the level of investment at Disney Plus is still unclear.

If one assumes that Disney Plus (a streaming service composed of the family brands Marvel, Star Wars, Disney, and Pixar) can quickly attain tens of millions of subscribers, it is fair to ignore the heavy upfront investment and look at just core Disney, or Disney as it stands today.  On that basis, 2019 should be a decent year despite incredibly difficult comps at the film studio.  On this basis, DIS shares look like they could have additional upside of 10-20%.  However, dilution could be heavy, driving EPS from over $7 in the just completed year to near $6 in 2019 and 2020.  If Disney Plus gets off to a slow start, the shares likely have similar downside.

At Northlake, we believe investors will give DIS the benefit of the doubt for the time being given the power of the company’s brands and management’s history of execution.  We also think that during a difficult market environment, it pays to stick with best companies and stocks that have been showing relative strength.  A tougher decision on the outlook for DIS shares is coming as we move through 2019.  For now, Northlake is sitting tight and comfortably long.

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.