Disney (DIS) reported another great quarter, comfortably beating analyst estimates.  The song remains much the same with the power of Disney’s content engine driving growth through the company’s theme parks, TV networks, consumer products, and film studio.  With a seemingly can’t miss lineup of franchise films including Avengers, Star Wars, Ant Man, and two Pixar films this year, Northlake’s thesis on Disney is still bullish.  History strongly suggests that when Disney gets on a content roll that earnings power and earnings surprises are greater than Wall Street expects.  While the stock’s P-E is at the high end of recent history and expensive compared to its peers, we think more upside earnings surprises lie ahead.  Furthermore, Disney has earned its premium valuation.  Northlake sees Disney rising to the mid $120s based up on a low 20s P-E on what we think could be earnings nearing $6.00 per share in 2016.

If there is one worry about Disney on Wall Street it is at ESPN where the pressure on the cable TV programming bundle is rising and may have reached a tipping point.  EPSN appears well protected to remain in the main bundle for every programming service including news ones like Sling TV, Sony Vue, or the upcoming Apple TV service.  However, ESPN’s economic model is built on being included in every programming package and getting paid by 100 million homes.  The company invests the fees it receives from cable and satellite companies directly into very expensive sports rights (NFL, NBA, MLB, College).  Should the bundle fray sooner and more significantly than we expect, ESPN could be at risk.  Most investors probably do not realize that Cable Networks, driven mostly by ESPN is Disney’s largest single line of business.

For now, ESPN’s place in the bundle seems very secure.  Thus, we remain focused on the content engine driving all the other lines of business form theme parks to Disney Channel to consumer products.  The story here is as good as ever.

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.