Disney (DIS) shares remain at a very challenging juncture at the company’s spends heavily on its primary strategic priority, shifting its media networks business to a direct to consumer model.  A key part of this strategy is the acquisition of most of 21^st Century Fox’s entertainment assets. In DIS’s latest earnings report, the company indicated spending at BAMTech (key to the DTC strategy) would lead to losses $100 million higher than previously projected.  The quarter also saw sharp deterioration in Media Networks profits margins from 37% a year ago to 34% this year.  Two years ago, Media Networks margins were 39%.  Furthermore, Comcast continues to pursue the Fox assets leading to the possibility that DIS would have to increase its offer, adding to the heavy investment in the DTC strategy.  Overall, Media Networks struggled and the core trends in subscribers and advertising continue to decelerate and paint a mixed picture at best long time.

In the meantime, the two other roads at the junction, Parks and Resorts and the Film Studio are booming.  Led by an unprecedented run at the box office, most recently, Black Panther and Avengers: Infinity War, the studio is growing rapidly.  The studio saw 20% revenue growth and 29% operating profit growth last quarter.  Parks and Resorts grew revenue 13% and operating profits gained grew 27%.  Operating margins in the segment were the highest we have in our spreadsheet for any second quarter.

Put it all together and DIS shares are difficult to forecast.  The stock trades at 14X projected earnings, below the market multiple by a significant amount for the nearly the first time ever.  It is hard to argue that DIS does not deserve at least an average multiple given its brand strength the deep interaction between its operating divisions.  However, CBS trades at less than 10X.  Time Warner is being out for 13X.  Discovery trades at 8X.  These companies may not be as strong as DIS but they all face similar secular challenges in subscriber growth, TV ratings, and sing growth and the expensive investments required to thrive in a new world of internet delivered TV; a world where success is not guaranteed.

Northlake is willing to give DIS the benefit of the doubt as the power of the company’s family friendly brands suggest success in an OTT world is possible.  While we wait to find out, Parks and Resorts the Film Studio can support the stock.

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.