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Walt Disney Co (DIS) Investors Shouldn't Sweat Streaming Costs

Between the pending buyout of a large part of Twenty-First Century Fox Inc. ( FOXA) and upcoming launches of two new streaming video services, Walt Disney Co. (NYSE: DIS) shareholders are currently dealing with a lot of uncertainty. Analysts say that uncertainty has been weighing on Disney's share price, but the company is well-positioned to make the next several years a huge success.

According to Loop Capital Markets analyst Alan Gould, the Disney-Fox deal is the best path forward for investors of both companies.

"We believe the DIS-FOX deal is a win-win, positioning DIS to be a more competitive player in the global streaming business, and FOX shareholders benefit through their equity in the larger entity that should have the scale to better compete with the internet platforms," Gould says.

[See: 7 of the Best Stocks to Buy for 2018.]

Disney stock has historically traded in a consistent and narrow valuation range based on its earnings, Gould says. Once the Fox deal is completed and Disney has successfully launched its ESPN streaming service in 2018 and its Netflix ( NFLX)-style TV and video streaming service in 2019, the stock will likely settle back down into its longer-term valuation range. Gould says investors shouldn't be too concerned with rising costs in the near-term.

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"The investment in streaming may depress the overall EPS growth rate over the next few years, which should be offset by the accretion from the announced Fox deal," Gould says.

As part of its preparation for the streaming rollouts, Disney recently announced some big changes to its corporate structure. Earlier this month, Disney created a brand new operating segment called "direct-to-consumer and international." The new segment will include both of its new streaming services, as well as Disney's ownership stake in Hulu.

The segment will presumably be a major source of revenue growth for Disney in the future, and Morningstar analyst Neil Macker says it will provide important transparency for investors.

"We believe the plan is primarily focused on positioning the direct-to-consumer business under one leader while also providing greater visibility into this growing revenue stream," Macker says.

[See: 9 of the Market's Best Growth Stocks.]

Macker is optimistic about Disney's ability to execute its streaming strategy. "Disney has mastered the process of monetizing its world-renowned characters and franchises across multiple platforms," he says.

Loop Capital has a "buy" rating and $130 price target for Disney. Morningstar has an "undervalued" rating and $130 fair value estimate for DIS stock.



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