Disney should report a profitable fiscal third quarter in a few weeks’ time, powered by its media networks and theme parks, predicts Wall Street analyst Steven Cahall of RBC Capital Markets. Even so, the misfiring of Star Wars spinoff Solo and uncertainty surrounding its M&A plans have prompted Cahall to lower his quarterly earnings estimates for the company.
Cahall still rates Disney as his top pick in the media sector and retains a 12-month price target of $135 a share, a healthy premium over its current level of about $104. Even so, in a research note today he wrote that a likely write-down of Solo would outweigh “favorable outlooks” for media and theme parks. Accordingly, Cahall has reduced his estimate of earnings per share by 4% due to Disney’s “transitional period.”
The battle for Fox has erupted after nearly six months of calm. Last December, Fox had accepted Disney’s $52.4 billion offer for the studio and network assets and rebuffed Comcast. prompting the entire industry to prepare for a Disney-Fox future.
In June, though, after AT&T was given the green light to buy Time Warner by a federal judge, Comcast came back aggressively with a counter-offer. That led Disney to raise its offer to the current level of $38 a share, or $71.3 billion. Cahall expects the brawl to continue, and that will have implications for Disney’s financial state.
“The ball is now in Comcast’s court to respond to Disney’s offer, which benefits from being 50% stock so as to lessen the balance sheet strain,” Cahall writes. Because the Department of Justice required Disney to agree to divest of Fox’s regional sports networks in order to gain approval for the deal, the projected $20 billion to $25 billion value of the RSNs gives Disney some maneuverability. In Cahall’s view, that component “suggests Disney can afford to pay even more for Fox.”
Because Comcast is doing the same calculations, Cahall added, “we wouldn’t be surprised to see Disney and Comcast bidding into the $40s” per share — meaning the $80 billion range. “As such, we expect Disney to be somewhat range-bound until the dust settles.”