BMO Upgrades Disney, Says Stock Has Downside Protection And Upside Potential

BMO Capital Markets' new bullish stance on Walt Disney Co (NYSE: DIS) is based on the belief shares have downside protection with catalysts ahead to support upside.

The Analyst

BMO's Daniel Salmon upgraded Disney from Market Perform to Outperform with a price target lifted from $114 to $140.

The Thesis

Disney is hosting its investor day presentation Thursday that should answer the key question "how low does EPS need to go," Salmon said in a note. If downward revisions to EPS estimates are appropriate, it could be viewed favorably as EPS reductions are the result of investments in new services and reinforces a bullish three- to five-year outlook.

In addition to offering clarity on near-term earnings, Disney is likely to also offer commentary on pricing for its streaming video platform. Management is likely to also provide sufficient information to make "informed estimates" of mid- to long-term profit and earnings.

Salmon says the new level of clarity from Thursday's presentation would support a transition to a sum-of-the-parts valuation model for Disney's stock. The move would be similar to how some Street analysts value Amazon.com, Inc. (NASDAQ: AMZN), which operates individual businesses that each have different financial profiles.

Salmon says a future SOTP valuation of Disney's stock would factor in earnings for the core business along with subscriber and revenue data to derive a value for the direct-to-consumer sub-segment.

The company has "fuel for future EPS" growth over the long term with downside protection at around $100 to $110 per share, according to Salmon.

Price Action

Disney's stock traded marginally higher Wednesday at $117.45 per share.

Related Links:

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