After years of moving sideways, it appears that Disney (DIS) shares may be finally ready to break out. The company’s valuation is attractive, it offers a reliable dividend yield, and the broader sentiment around the company appears to be changing. CEO Bob Iger’s vision for Disney’s OTT streaming platforms is becoming a reality and I think it’s only a matter of time before analysts focus again on the success of the overall company, instead of just worrying about the cord cutting issues that face Disney’s media business.
Without a doubt, Disney has been in a slump for some time now. The company’s reliance on embattled ESPN and the media segment for a very large part of its sales/earnings has cast a shadow over Disney’s studio/theme part segment success in recent years as analysts focus on the cord cutting phenomena. However, throughout, I’ve been happy to beat the Disney drum.
A couple of years ago, DIS was my largest holding. Since then, it’s been surpassed by Apple (NASDAQ:AAPL) due to the outstanding performance of AAPL shares. Even so, I’ve never been tempted to sell my DIS shares. As a shareholder, I love partnering with an institution like Disney. I think it’s clear that the Mouse House is the king of content, and with a leader like Bob Iger, what more could you ask for? And now that the Fox (NASDAQ:FOX) deal has closed and the Comcast (CMCSA)/Sky related lose ends appear to be tied up, DIS shares are finally rallying back towards the 2015 highs.
Since peaking at ~$121/share in August of 2015, Disney’s shares have traded sideways. This has resulted in strong underperformance relative to the S&P 500, which is why many investors are so down on Disney’s stock.
However, it’s worth noting that during this period of time, Disney’s fundamentals have continued to improve.
DIS’s revenues in 2015 totaled $52.4B. During the trailing twelve months, DIS has generated nearly $58B. In 2015, DIS’s EPS totaled $4.90/share. During the trailing twelve months, DIS has generated $7.95/share in earnings. This means that DIS’s EPS is up ~62% since 2015.
While the market has focused on subscriber numbers and demand for cable content, DIS has continued to print outsized profits. Operational cash flows are up ~27% since 2015 and free cash flows are up ~48%. Disney continues to provide investors with reliable annual dividend growth and the company’s management team has effectively used stock buybacks to reduce the outstanding share count by ~10% since 2015.
Debt has increased, though I don’t blame management in the least for raising debt in pursuit of growth while rates remain low.
When I look at Disney’s fundamentals over the past 3 years, I find little to complain about. Sure, ~10% total revenue growth over a 3-year period isn’t stellar, but it also doesn’t point towards a failing operation. On the contrary, Disney’s operations are very solid, with the studio segment breaking records seemingly ever year with blockbuster after blockbuster, the parks/resorts full to the brim, and their content portfolio looking better than ever after the marriage with Fox.
Personally, I’m a huge fan of the Fox deal. I’ve gone over this before in more detail, but in general, I think bringing together more Marvel properties (I don’t think the comic book movie trend is going to end anytime soon) and adding Avatar (which already had synergies with Disney via Animal Kingdom at Disney World) is huge.
I also really liked the fact that the deal gave Disney exposure to Sky, and therefore, international expansion opportunities, but I’m also a fan of the price that Disney/Fox is getting from Comcast for its stake in Sky and that money will go a long way towards reducing the debt involved in the Fox acquisition. Reducing that burden on the balance sheet should allow Disney to make more moves in the more immediate future.
Personally, I’d really love to see Disney’s next target be a video game studio. I’ve been saying that Activision Blizzard (NASDAQ:ATVI) and its immense (and very well developed) IP portfolio of content would fit nicely into Disney’s current operations. Nintendo (NYDOY) would be an even better fit, in my opinion, with its exposure to the famous Mario characters/world, as well as Pokémon, but I realize that Nintendo is a national treasure in Japan and I highly doubt that it will be taken out by a foreign buyer.
Regardless, while I am a bit disappointed that Disney won’t be getting a major foothold into growth markets like India with the Fox deal, I am happy about the updated finances involved, and regardless, I’m never going to assume that a decision that Iger signs off on is the wrong one. To this point, he’s earned that benefit of the doubt (to say the least) and I have the utmost trust in his ability to run this company.
In the short term, the ~$15B that Comcast will be paying DIS/FOX should go a long way towards further developing Disney’s OTT platforms. DIS already has the best content, and once it has the distribution in place, I think it’s only a matter of time before it becomes a major player in the streaming space. The ESPN Plus app is already doing quite well, with the company having recently announced that it has surpassed 1M paying subscribers during the 5 months or so since being launched in April. I suspect that DIS will have similar success with its family friendly service, Disney Play, that it is supposed to launch sometime next fall. Disney Play is reportedly going to cost significantly less than Netflix and I imagine it will be a to-go service for cord cutting families.
Also, Disney retains a large stake in Hulu, and although that platform is not currently profitable, I like the upside it brings (in terms of either another distribution option for more mature oriented content and/or as a bargaining chip/sales piece in a potential M&A deal).
With all of this in mind, I think the market’s negative sentiment surrounding Disney that has lead to the company’s P/E multiple falling from 24x in 2015 to 17x today (prior to the recent run-up in share price, DIS’s multiple fell to as low as 15x earlier in the year) is unjustified.
I’ve always found it odd that investors have been willing to pay totally irrational prices for Netflix, whose profits are but a drop in the bucket compared to Disney’s. Sure, Disney’s media segment has lost subscribers, but even so, Netflix management would probably kill to have similar operational metrics associated with their business.
I know that Disney is no longer shiny and new in the market’s eyes and it’s easy to overlook old, stodgy, blue chip companies in favor of the exciting newcomer, but I’ve been happy to ignore the luster and focus on the financials, which have always been decidedly in Disney’s favor.
Historically, the market has placed a premium valuation on Disney. The company’s 20-year average P/E ratio is 21.3x, which is well above the ~16x multiple that the S&P 500 (SPY) has traded at historically. Right now, the SPY trades for approximately 23x TTM earnings. So, even though DIS has been on a nice run as of late, bouncing ~$15, from $100/share to $116/share during the last 3 months or so, shares are still relatively cheap (at least, based upon the historical valuation spread between DIS shares and the SPY).
Source: F.A.S.T. Graphs
What’s more, in a relatively expensive market, not only does Disney offer a relatively cheap valuation (though it’s worth noting that DIS still trades at a premium to its peers in the media space, so deep value investors are probably going to want to take a closer look at Comcast or CBS Corp. (CBS), which trade for 15x and 11.5x TTM earnings, respectively), but a dividend yield that is only 30 bps lower than the broader markets.
I believe that DIS has better long-term dividend growth prospects than the broader market and it’s worth noting that DIS is due to announce a dividend increase later in the year which could easily bump its yield up to par with the SPY’s. Disney isn’t a dividend aristocrat because it does freeze its dividend from time to time during bear markets, but it also hasn’t cut its dividend in decades, and even though there have been a handful of years that resulted in 0% annual dividend growth results, DIS has produced a dividend growth CAGR of ~11.5% over the last 20 years.
Source: F.A.S.T. Graphs
More recently, DIS’s increases have been in the high single digits. I wouldn’t be surprised to see that trend continue in the short term because of the investments that the company is making to broaden its moat and ensure its future as we move into the digital age. But, I suspect that over the long term, things will even out and DIS will maintain that low double-digit average. I’m not going to complain about a company pounding the passive income that it generates for me at a ~10% clip over the long term. I’ve done the math; assuming that keeps up for another couple of decades, that will result in my wife and I enjoying an early, comfortable retirement.
The Fox deal really changed the narrative around this company and I think the good new will continue to roll in as we near the launch of the Disney streaming platform in 2019. Disney’s studio segment is likely to have another record breaking year in 2019. The broader economy appears to be strong, and even though we’re late in a market cycle, there doesn’t appear to be major threats of a recession on the horizon (at least, in the very near term). Disney is a cyclical name due to relying heavily on discretionary spending, and that doesn’t typically bode well for the name during bear markets; however, I think the potential for the high margin streaming business can and will do wonders for the company’s multiple in a variety of markets, good and bad.
Needless to say, Disney has a lot going for it and I think investors and analysts alike are starting to catch on. I’m not rushing out of the door here to add to my Disney position at 52-week highs, but I am very excited about what the future holds for this company in the short term, and if you aren’t already long Disney and you’ve been purposely overlooking this name because you viewed it as a thing of the past, I think it’s time to look again. I’m never one to bet against a proven leader (which is why Disney makes up ~6.7% of my holdings), and if I had to guess, this company will be the leader in the entertainment space in the future, just as it had been in the past. In a world where big tech is increasingly coming under pressure, I wouldn’t be surprised to see the old guard like Disney regain a bit of leadership.
Disclosure: I am/we are long DIS, CMCSA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.