Following a disappointing result in the June quarter with unexpected weakness in Disney’s core business segments, September quarter earnings were improved with stabilization or improvement in theme parks and acquired 21st Century Fox film and TV operations.  This led to a relief rally of 3% in DIS shares which had pulled back from $140 to $130 since the weaker June quarter report.  More importantly, getting the core stabilized clears the deck for the November 12^th launch of Disney +.  The initial response measured by subscriber counts will determine the next move in DIS shares.  Northlake is optimistic that the service will debut strongly and allow DIS shares to move toward $150 over the next couple of quarters.  Longer term, a successful pivot toward direct-to-consumer, internet delivered services from cable and satellite distribution sets DIS shares up for a move materially above the initial $150 target.

DIS has become a very difficult company to analyze and value as it is in the midst of a massive transition to build Disney+, ESPN+, and Hulu into large growth businesses while continuing to invest in and grow theme parks and the film studio.  The traditional media businesses including ESPN, ABC, and now FX will serve to provide high free cash flow to support the large content investments required in the OTT/DTC streaming wars.

While the stock will remain sentiment driven, we look at valuation a couple of ways.  On its call, Disney affirmed the guidance it gave for 2020 investment spending and Fox dilution, thus creating an EPS target of $5.50-$6.00 excluding non-cash amortization of goodwill.  On the assumption that Disney+ is a success, we think the shares can trade at 25X 2020 earnings which gets you to $150 at the top end.  A better valuation is to consider that Disney’s core businesses before the DTC spending/losses will earn about $8 next year.  Given the premium nature of these assets especially theme parks and the film studio, these earnings should be worth at least a market multiple.  Presently, the S&P 500 is about 17X projected 2020 earnings.  This creates $136 in value for DIS shares.  Maybe a modest discount is appropriate since peers to ESPN trade at just 5-10X and ESPN and Disney’s Media Networks division is still the company’s largest.

Valuing Disney+ is basically a shot in the dark.  Typical Wall Street valuation measures would be $X per subscriber or X times projected revenue.  If we say $120 in value exists at the core then we need $30 from the DTC businesses to get to $150.  DIS has 1.8 billion shares outstanding meaning that the DTC businesses have to be worth $54 billion.  As comparisons, Netflix has a market cap of $128 billion and Roku’s market cap is $15 billion.  To use a cliché, valuing DIS is more art than science but given the potential for tens of millions of subs to Disney + over the next few years, $54 billion seems reasonable.

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 wvww.sec.gov