Stocks

Disney Stock Will Climb in 2016 Thanks to 3 Catalysts

By Cameron Saucier, Associate Editor, Money Morning • February 4, 2016

Yes, Disney stock is already down almost 8.6% this year, and 15.2% in the last three months.

"Star Wars: The Force Awakens" failed to give Walt Disney Co. (NYSE: DIS) stock the much-anticipated boost in January, despite surpassing over $1.5 billion in domestic box-office revenue.

But there are three major reasons we're still bullish about Disney stock in 2016.

You see, the entertainment company has three expanding revenue streams that will give its stock a much-needed boost in the next few months.

First, here's why Disney stock has dropped in 2016...

One of the biggest reasons for Disney stock's 2016 drop is the broader market sell-off. The Dow Jones Industrial Average posted its worst 10-day calendar start ever in January. Many fundamentally sound companies were hurt by this broad market sell-off - Disney included.

Since November, many investors have also been fearing the effect "cord-cutters" will have on Disney's most lucrative TV networks, like ESPN and the Disney Channel. Cord-cutters is a term for former cable subscribers that switched to streaming services, like Netflix or Apple TV.

Here's the thing though: These fears about cord-cutters are completely overstated.

Yes, ESPN reported it lost three million subscribers in Disney's last fiscal quarter, down to 92 million. To be fair, that's a sizeable loss.

Cord-cutting, however, will actually benefit Disney. That's because new streaming platforms have smaller channel offerings than traditional cable companies. And these platforms want to offer the best content available. Because Disney's networks like ESPN and A&E are so popular, it has the leverage necessary to negotiate profitable contract deals.

In the past, Disney CEO Bob Iger has even said cord-cutting catalysts like Netflix are profitable for Disney. Iger said Netflix is one of Disney's most aggressive customers.

But if you're still concerned about cord-cutters, Disney has created three new revenue streams that will drive Disney stock in the long term...

3 New Revenue Streams That Will Boost Disney Stock

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The Star Wars Franchise is a long-term revenue booster: "Star Wars: The Force Awakens" is estimated to surpass $2 billion in revenue at the box office this week, according to the Los Angeles Times. Disney reports its first-quarter earnings on Feb. 9, and analysts expect "Star Wars" will boost its revenue figure. Analysts estimate Disney will report $14.8 billion in revenue, compared to $12.5 billion in the first-quarter of last year. The "Star Wars" franchise has been a huge contributor to Disney's consumer product division. "Star Wars" generated more than $700 million in sales, according to a report from retail research company NPD Group. Analysts estimate Disney will recover its $4 billion purchase of Lucasfilm in just two to three years. And with more "Star Wars" movies on the way, Disney will be milking the "Star Wars" franchise for years to come.
Disney's new Shanghai theme park expands and diversifies its resort segment: In June, Disney will launch its largest theme park in China: the Shanghai Disney Resort. Analysts predict the $5.5 billion theme park will see 12 million visitors in its first fiscal year, according to the Nikkei Asian Review. Once the third phase of the park is finished, that number will jump to 40 million. Disney's expansion in Shanghai enables it to better deal with a slowdown in attendance at its theme parks in the United States. China has the fastest growing economy in the world, and Disney made a smart move by taking advantage of that fact.
Disney's Marvel Cinematic Universe will expand more in 2016: Like its "Star Wars" franchise, Disney is making big bucks from its acquisition of Marvel in 2009. Since then, it's been churning out one successful Marvel movie after another, with 15 new titles on the way for 2016. The Marvel franchise has generated $9 billion in revenue, making it the highest-grossing franchise of all time. But by far Disney's most profitable investment is connecting the Marvel franchise with its theme park and consumer products segments. This is helping Disney reach consumers in every possible way, creating a long-lasting revenue stream.

The Bottom Line: Investors' cord-cutting fears about Disney are overblown and will not affect Disney stock in the long term. Disney will scale its three new revenue streams, which will more than make up for any losses from cord-cutting. Disney's assets are so powerful and diversified, they ensure positive, stable growth for years to come. Disney stock is one to hold in 2016.

Tweet the author @cgsaucier, or leave a comment on Money Morning's Facebook page.

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