Weekly Wrap: Pricey Snap, Cheap Disney, Coach Shops for Kate
Snap's first quarter showed mixed results, and we still see shares as overvalued. Plus, not all bad news for Disney, and perhaps some silver linings post-Buffett for Berkshire.
Snap's first quarter showed mixed results, and we still see shares as overvalued. Plus, not all bad news for Disney, and perhaps some silver linings post-Buffett for Berkshire.
Jeremy Glaser: Snap's still expensive; Disney looks cheap; Coach snaps up Kate Spade; and what will Berkshire look like after Buffett? This time on the Morningstar Weekly Wrap.
Shares of Snap plummeted after it reported its first results as a public company. Ali Mogharabi still thinks shares are pricey.
Ali Mogharabi: Snap kicked off its first year as a public company with mixed first quarter results. It looks like the company can more effectively monetize its user base, but we're still not confident it can do so on a consistent basis.
Now, Snap's sluggish user growth was disappointing, especially for a company that remains in a growth stage. Although the user engagement did increase nicely, we still think that advertisers look for growth in both users and user engagement. Plus, the increasing competition from Facebook's Instagram ups the necessity for Snap to increase its user growth rate.
With that said, we've maintained our fair value estimate of Snap, and while the market's reaction has driven the stock down nearly 20%, we still think it's overvalued.
Glaser: Disney reported results this week that showed weaker than expected advertising revenue and subscriber losses for the media networks, but things weren't all bad with rising affiliate fees, strong ratings for ESPN, and a smaller than expected hit to margins from a new NBA deal.
Strong results from the parks business, driven by the new Shanghai resort, also helped offset the negatives in the quarter. Analyst Neil Macker sees shares trading at an attractive entry point.
Coach's purchase of Kate Spade looks sound to analyst Bridget Weishaar.
Bridget Weishaar: We think Coach's acquisition of Kate Spade makes a lot of sense. First of all, there's significant overlap in materials and manufacturing, and we think Coach can get about $50 million in synergies out of this deal.
Second, it gives Coach access to a whole new consumer base. We estimate that there's only about 10% overlap between current Coach customers and Kate Spade customers.
Third, Kate has tremendous global growth potential. With Coach's skill in growing brands globally, and also protecting them in their distribution channels, we think that Coach can get double-digit accretion out of this deal by fiscal 2019.
Glaser: Last weekend's Berkshire Hathaway Annual Meeting had plenty of highlights, but one interesting question that kept coming up is what will happen to the firm after Buffett leaves. Analyst Gregg Warren thinks there could be some silver linings to his departure.
Gregg Warren: That said, I think the longer-term hope for a lot of investors, first and foremost is, the company offers a dividend once he's no longer running the show. That may happen sooner, based on some of the comments he made today, but I think the other, longer-term thing is, this company could pretty easily be broken up if need be. But we'd have to get five, 10, maybe even 15 years down the road before we got to that level.
There's plenty of stuff that the new management team can do. Just reducing the amount of cash that's kept on the balance sheet would make returns look better.
Glaser: And in case you missed it on Morningstar.com this week, Russ Kinnel looked at five funds that are hoarding cash today.
Jeremy Glaser has a position in the following securities mentioned above: DIS. Find out about Morningstar’s editorial policies.
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