Disney Shares Are Poised to Outperform in 2013

Nauman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The first-quarter of Walt Disney's (NYSE: DIS) fiscal year ended on December 29, 2012 and the performance was above expectations. The company generated $1.1 billion in operating cash flow, and when adjusted for the working capital changes was in-line with last year’s quarter. Revenue jumped 5.2% year-over-year to $11.34 billion, exceeding consensus estimates.

The Media Networks segment performance was solid, while Cable networks earnings fell slightly; the company noted higher content costs at ESPN, but showed strength in the advertising at ABC Family. Most notably, broadcasting saw increased advertising dollars during the political season -- higher advertising revenue at the owned television stations was also driven by political advertising.

Moreover, the firm's Parks and Resorts segment remained strong: average ticket prices, park attendance and resort occupancy, and average guest spending within the park all increased. Revenue in the Consumer Products segment was strong as well; fueled by licensing, publishing, and retail growth. However, Studio Entertainment segment came in below expectations. Revenue in the segment declined 5% from the year-ago quarter; fueled by lower home entertainment results that fell almost 33%. Nonetheless, the segment maintained its profitability, and has numerous planned films to be released in 2013. Overall, it was a good quarter.

Moreover, 2012 altogether was a banner year for Disney. The company reached an agreement granting Netflix (NASDAQ: NFLX) exclusive streaming rights to Disney, Pixar, Marvel as well as Lucasfilm's movies starting from 2016. Netflix deal with Disney underscores how on-line viewing has become mainstream and poses a serious threat to traditional pay TV.

Netflix began 2012 with about 21 million streaming subscribers and expanded that figure to more than 27 million by the end of the fourth quarter. Since Netflix itself faces increased competition from Amazon Prime, Redbox Instant, and Hulu, this exclusive content deal with Disney could help it offset some of the competition going forward.

Disney also announced the acquisition of Lucasfilm in 2012. The deal brought Star Wars and Indiana Jones franchises, which are two of the most successful movie franchises ever. Disney also announced that a third trilogy of Star Wars movies will be made, and scheduled to be released in 2015. This news is a positive for both Disney and Star Wars fans. All told, I believe Disney is set to have a strong 2013 and beyond, with the potential to release many blockbuster films that would support the company's earnings growth ahead.

Current Valuation

Disney trades at 18 times trailing earnings. Analyst expectations are for $3.44 in EPS for the current fiscal year, and the current stock price is 16 times that figure, compare to its peer average of 23. Disney has an impressive cash flow generation, and when I look at the enterprise value implied by the current stock price, it is only 10.5 times trailing EBITDA, not as obviously low a multiple, but still well within value territory for such a large and growing company. Moreover, Disney pays a dividend that has grown rapidly since it was first started.

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The share count has already fallen from almost 2.1 billion in fiscal 2007 to 1.77 billion at the end of 2012, and considering the management's plan to spend a big chunk of the future cash flow on buybacks and dividends, this trend should continue.

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Foolish Bottom-line

It is my view that the risk to Disney's fundamentals are overwhelmingly skewed to the upside, which presents a very clear and intriguing investment opportunity on the long side. Disney has historically managed mid-teens cash flow margins -- I believe the company can boost that margin into the high teens, which will lead to a steep-looking compound cash flow growth rate of over 20%.

Running those growth assumptions through a cash flow model, fair value on Disney comes out around $72 - making it one of, if not the, cheapest company in the Dow Jones Composite today. To put it succinctly, Disney may just be poised to follow up a strong 2012 with still more performance in 2013.

MaaniValueGuru has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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