Disney: Fox Acquisition, Streaming, and Tax Reform

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

FY2018 is off to an excellent start for The Walt Disney Company (NYSE:DIS) with a confluence of growth catalysts via streaming, studio strength, Fox acquisition and tax reform legislation. Disney has been establishing a firm footing in the streaming space via Hulu (30% stake and will likely be expanded to a majority 60% stake after the Fox acquisition), BAMTech, Sling, ESPN streaming service and a Disney branded service coming in 2019. The studio segment is off to a great start with record-breaking movie releases such as Thor: Ragnarok and Star Wars: The Last Jedi surpassing $850 and $900 million in worldwide box office receipts, respectively. Disney is evolving to address the deteriorating Media Networks business segment with major streaming initiatives. Disney has one of its biggest movie slates for FY2018 with Blank Panther, The Avengers: Infinity War and Solo: A Star Wars Story around the corner. Disney also announced that it is acquiring 21st Century Fox’s assets to further drive growth for $52 billion. This acquisition brings in noteworthy studio assets such as more Marvel properties (X-Men, Fantastic 4 and Suicide Squad) and Avatar along with TV content, regional sports and a 60% majority stake in Hulu. Disney currently pays a 33% effective tax rate and now with tax reform signed into law; this rate will be dramatically reduced a third to 21%. Disney can deploy more cash into growth initiatives and return value to shareholders via increased dividends and share buybacks with the increased cash flow. Disney offers a compelling long-term investment opportunity considering the growth, Fox acquisition, pipeline, Media Networks remediation plan, diversity of its portfolio, tax reform, share repurchase program and dividend growth.

Transformative Fox Acquisition

Disney shelled out $52 billion to acquire many of Fox’s assets to drive future growth in regional sports, movies, TV programming and foreign market penetration. This is a transformative acquisition as Disney will take control of the movie studio and significant TV production assets and gain exposure to international markets through Fox’s networks via a 39% ownership of Sky (Figures 1, 2 and 3). In addition to the movie studio, TV production and international assets such as Star and Sky, Disney will also add entertainment networks such as FX and National Geographic. Bob Iger stated that the deal should close in 12-18 months and highlighted the chance to expand Fox's Avatar franchise particularly considering new theme park lands. In addition to expanding the Marvel Universe via X-Men, Fantastic Four, and Deadpool, Disney will obtain Fox's distribution rights to the first Star Wars film. The deal will be accretive to EPS for the second fiscal year after closing, says Disney CFO Christine McCarthy, and Disney expects roughly $2B in cost synergies by 2021. Taking a majority stake in Hulu will further accelerate Disney’s streaming capabilities and compete directly with Netflix (NFLX). Taking majority control of Hulu is going to be beneficial and result in "flowing more content in Hulu's direction," and managing Hulu "becomes a little more clear, a little more effective." Turning to sports, combining Fox’s sports content with Disney’s ESPN will be synergistic and a "perfect complement" to ESPN's offerings, which are national in nature and will benefit from regional focus, Iger says. Continue reading "Disney: Fox Acquisition, Streaming, and Tax Reform"

McKesson - Mounting A Resilient Comeback

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

McKesson Corporation (NYSE:MCK) has shown signs of life as of late with a recent rally from $135 to $162 or a 20% move to the upside. The stock has demonstrated resilience over the past 12 months as this same move occurred earlier in the year as well. There’s been a tremendous amount of pressure on the pharmaceutical supply chain players due to public and political outcries over drug pricing with subsequent fierce pricing competition within the space, opioid epidemic, Amazon potentially entering the fray and possible erosion of the pharmaceutical wholesaler model. Social and political pressures over drug pricing and opioids have exacerbated these issues translating into slowing drug price increases and increased scrutiny on sales which negatively impacts McKesson’s ability to capture larger margins and volume of business. McKesson had missed several revenue targets for six consecutive quarters until its most recent quarterly earnings beat for Q2 FY2018. McKesson has paid dearly for this string of revenue misses, shedding over 44% of its market cap falling $106 per share from its all-time highs in May of 2015 falling from $240 to roughly $134 as of its recent Q3 2017 miss (Figure 1). McKesson has made a string of acquisitions throughout this time frame to circumvent the exogenous events related to its deteriorating business. As McKesson tries to navigate these challenging waters, I feel long term the stock has more upside starting with its most recent earnings beat catalyst.

3-year chart for McKesson
Figure 1 – Google Finance 3-year chart for McKesson

Opioids and Pharmaceutical Drug Wholesalers

60 Minutes recently aired a piece on the opioid epidemic unfolding in the U.S., which was highly critical of the pharmaceutical drug wholesalers and their alleged role in this crisis. An interview was conducted with DEA whistleblower Joe Rannazzisi who stated that distributors had turned a blind eye to opioids being diverted for illicit usage. The three main pharmaceutical drug wholesalers that were singled out were AmerisourceBergen (ABC), McKesson (MCK) and Cardinal Health (CAH) which all sold off significantly once the report surfaced. Opioid-related stocks were also negatively impacted as a result which consisted of a basket of micro-cap and small-cap stocks. Continue reading "McKesson - Mounting A Resilient Comeback"

CVS: Aetna Acquisition - Desperation or Prudent Acquisition

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

CVS Health Corporation (NYSE:CVS) is going all in with a $69 billion acquisition of Aetna Inc. (NYSE:AET) to form a colossus bumper-to-bumper healthcare company. This new CVS will combine its existing pharmacy benefits manager (PBM) and retail pharmacies with the second largest diversified healthcare company via the proposed Aetna acquisition. This is a hefty price tag yet may be necessary to compete in the increasingly competitive healthcare space in the face of drug pricing pressures. The $69 billion acquisition will not come cheap and require issuing debt and diluting the share base as this will be funded via a combination of stock and cash. CVS has been in a downward spiral since its all-time highs of $112 in 2015 to lows of $67 in 2017, translating into wiping out 40% of its market cap. Several headwinds have negatively impacted its growth, and the changing marketplace conditions have plagued the stock. Exacerbating this downward movement, Amazon (AMZN) has entered the fray and has resulted in another leg down for the stock. The latter half of 2015 through 2017, the political backdrop was a major headwind for the entire pharmaceutical supply chain from drug manufacturers to pharmacies/pharmacy benefit managers (i.e., CVS and Walgreens (WBA)) and the drug wholesalers in-between (i.e. McKesson (MCK), Cardinal Health (CAH) and AmerisourceBergen (ABC)). Lastly, Amazon’s purchase of Whole Foods and behind the scenes moves in the healthcare space has incited rumors that Amazon is looking to gain entry into the pharmacy space via leveraging the Whole Foods physical footprint. The Amazon threat has become a formidable challenger in this space as it has in the past with other industries with its first real pivot after acquiring Whole Foods with major plans in entering the pharmacy space. I believe CVS will undergo short-term stock pressure but long-term appreciation as this move was a defensive yet necessary acquisition moving into the future.

CVS Health/Aetna

Aetna Acquisition

The Aetna acquisition creates the first through-in-through healthcare company, combining CVS's pharmacies and PBM platform with Aetna's insurance business. Per the agreed terms, Aetna stockholders will receive $207 per share, $145 in cash and $62 in stock. Collectively, the acquisition is valued at $78 billion.

"This combination brings together the expertise of two great companies to remake the consumer healthcare experience." "With the analytics of Aetna and CVS Health's human touch, we will create a healthcare platform built around individuals." CVS President and CEO Larry Merlo said in a statement. Continue reading "CVS: Aetna Acquisition - Desperation or Prudent Acquisition"

Hasbro - Major Tailwinds Ahead

Noah Kiedrowski - INO.com Contributor - Biotech


Introduction

It’s been an eventful couple of months for Hasbro Inc. (NASDAQ:HAS), the third largest toy maker in the world with Toys R Us filing for chapter 11 bankruptcy and a rumored acquisition of rival toymaker Mattel Inc. (NASDAQ:MAT) all while the stock has been trading erratically in the backdrop with 10% swings in the stock price. As a result of the Toys R Us bankruptcy filing, Hasbro had to lower its guidance through the holiday season, and as a result, shares initially tumbled 9% on the news. Recently, Hasbro had witnessed a huge sell-off from its 52-week high of $116 to $88 or a 24% slide after reporting its most recent quarterly results with lowered guidance due to the Toys R Us bankruptcy filing. Hasbro develops toys for many of the multi-billion dollar movie franchises such as Marvel Universe, Star Wars, Disney Princesses, Frozen, Transformers and Jurassic World. Hasbro has many catalysts in the near term with major movie franchises coming into the fray with upcoming Disney releases: Thor: Ragnarok and Star Wars: The Last Jedi to round out 2017. It's noteworthy to point out that Thor: Ragnarok has topped $675 million thus far at the international box office and closing in on the $750 million mark in theatrical release rising to the 10th highest grossing movie in 2017. In 2018, Black Panther, Avengers: Infinity War, Star Wars Han Solo spinoff and Ant-Man and The Wasp to highlight a few major movies. Taking into account Hasbro’s growth, the potential acquisition of Mattel, Q4 2017-Q2 2018 catalysts, trading at a P/E of ~20, boasting a 2.4% yield and initiatives within Hasbro Studios to propel growth further presents a compelling buy after this recent sell-off below $100 per share. Continue reading "Hasbro - Major Tailwinds Ahead"