Morgan Stanley Upgrades Disney In Reversal Of Bearish Media Call
Disney (DIS) saw its shares upgraded to Overweight today by Morgan Stanley as part of a positive call on the larger media sector, with the research firm arguing that ESPN, an intermittent overhang for the stock, has room for incremental growth on the back of new streaming services and renegotiated distribution fees.
DISNEY UPGRADED TO BUY: Morgan Stanley's Benjamin Swinburne upgraded Disney to Overweight while raising his price target to $124 from $101, arguing Monday that expectations have now "largely reset." Notably, the analyst also cites "potential" for ESPN to accelerate sales growth against a better-managed cost base. Swinburne sees Disney's cable affiliate revenue growth improving from 2% last year to 5% in 2017-2020, explaining that he models opportunities coming from both volume and rate gains: The expansion of streaming services creates room for "incremental" ESPN distribution, with risk around the network's subscribership now skewing to the upside after three years of erosion, while the upcoming 2018 distribution negotiations should offer Disney an opportunity to flex its pricing power. The analyst adds that new, growth-hungry entrants including Hulu Live and the rumored YouTube Unplugged will offer premium affiliate fees. Swinburne also contends that the company's studio business should rebound to record profit in 2018 on a "strong" release slate, including four Marvel films, two Star Wars films, and two Pixar features, though the analyst concedes that franchise fatigue "remains a potential concern." On potential strategic moves, Swinburne expects an eventual "a la carte" ESPN service in the vein of Time Warner's (TWX) HBO GO, which he sees co-existing with ESPN's bundle presence and helping to deliver "more earnings stability than the market presumes."
MORGAN STANLEY SAYS MEDIA SPACE ATTRACTIVE: Morgan Stanley's upgrade of Disney comes alongside the research firm's wider upgrade of the Media sector to Attractive from Cautious. In that larger look, Swinburne says he sees "healthy upside" in TV-centric media stocks through 2017, arguing that accelerating distribution revenues from new streaming services and other factors are not priced in, that TV advertising is "proving resilient," and that valuation levels are "defendable" into 2018 earnings acceleration, with corporate tax reform forming another potential tailwind. The analyst names Viacom (VIA), Disney, Madison Square Garden (MSG), and Lionsgate (LGF.A) as his new "final four," resuming coverage of Viacom and taking Madison Square to Overweight on the former's "compelling risk/reward" and the latter's discount valuation.
PRICE ACTION: Shares of Disney are up 1% to $110.36 in afternoon trading.
Disclosure: None.