How Much is the Mouse Worth?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you have kids, you know about Disney (NYSE: DIS). Going with the “buy what you know” theme that Peter Lynch suggested, I have to admit, I haven't researched a company that I know very well. I grew up with Mickey Mouse as did millions of others, I have a son and he is growing up with Mickey too. We've watched many Disney movies, and we are planning on taking a vacation to Disney World sometime in the next few years. With diversification of revenue streams and an iconic movie library, it seems like Disney should be a good investment.
Disney operates with five distinct divisions: Media Networks, Parks & Resorts, Studio Entertainment, Consumer Products, and Interactive Media. Using their most recent earnings release you can see how each division contributed to revenues in the last quarter:
You can see that their two largest divisions Media Networks and Parks & Resorts essentially drive the company, with over 73% of revenues coming from these divisions. Let's look in detail at both of these divisions as well as the Studio Entertainment division.
The Media Networks division is three families of channels: ESPN, Disney, and ABC. ESPN is the growth driver and was primarily responsible for the growth of 8% year-over-year in cable revenue. On the broadcasting side of things, ABC showed flat growth because of higher rates charged, but lower units sold. ABC is going to have a major challenge in just months when Desperate Housewives finally closes the curtain on the show. ABC still has some major shows, but the channel seems to have difficulty generating consistent hit shows in the way that FOX, CBS, and NBC have. The fact that ABC showed 7% less revenue and 23% less operating income in the last quarter, is proof that the channel is having its challenges.
The Parks & Resorts division showed good growth in the last quarter with revenues up 10% and operating income up 18%. I would suggest that this theme should continue as we move into the spring, summer, and fall months. These are generally the strongest months for the parks, and if the economy continues to improve Disney will pick up business. With nearly 30% of revenues coming from this division this could be a significant growth driver for the company.
Studio Entertainment includes both Disney movies and Blu-ray and DVD sales. Rather than compare what happened in the prior quarter, it makes the most sense to look at what is coming up for Disney. In the next several months, Disney, Pixar, or Marvel (all Disney companies) are releasing: 3-D Finding Nemo, Brave, The Avengers, The Amazing Spiderman, and Wolverine 2 among others. Considering that last year Disney's major releases were Pirates of the Carribean: On Stranger Tides, Cars 2, and The Muppets, it seems like Disney is heading into a better movie year. In addition 2013 looks even more promising with Iron Man, Thor, Pirates, and Monsters sequals along with a Phineas and Ferb movie. If you don't know Phineas and Ferb, just ask your average kid and they will probably start singing the theme song. Since Studio net income was up 10% with a weaker showing last quarter, I wouldn't be surprized if Studio Entertainment becomes a more important driver of Disney's growth at least for this year and next.
With Disney stock selling at about $42.54 the stock has a 14.42 forward P/E ratio. This is near the higher end of its last 5 year historical P/E ratio. However, investors have been willing to pay between 9 and 19 times earnings for Disney in the last 5 years, while the company grew earnings by about 6%. If Disney can meet analyst expectations for the next 5 years and grow at 12%, in theory this multiple range should expand. If a 6% growth rate equals an average P/E of 14, then a 12% growth rate could command an average P/E of near double that. Even if the market didn't believe that this higher growth rate would last, it seems that Disney is set up to have a nice run. Competitor News Corp (NASDAQ: NWS) sells for a similar forward P/E to Disney. However, without the draw that Disney parks have, and with only two big name films coming in 2012 (Titanic 3-D and Ice Age: Contiental Drift), News Corp doesn't have the same tailwinds that Disney should have. Disney also has a dividend yield of about 1.4%, and this dividend has been growing at over 8% in the last few years. If Disney can monetize these upcoming films, and turn in strong park performance, this dividend could be raised at an even faster rate. When you consider that Disney only paid out about 22% of its free cash flow last year, you can see the company could afford a more significant dividend.
The “mouse house” seems to be in pretty good shape. The company's ESPN networks are the undisputed leader in sports. ABC is a drag and will have to work hard to replace lost advertising revenues with Desperate Housewives going off the air. However, the Parks & Resorts segment should be a significant contributor based on a stronger economy. Studio entertainment has a strong lineup of films for 2012 that only gets better going into 2013. It seems that Disney could be undervalued based on current pricing. All of the above factors make it likely that Disney will achieve a higher forward growth rate than previously. Since the stock is selling at the average P/E of the last 5 years, this could be a good entry point. I'm making my outperform call on DIS today on CAPSCall. Let me know what you think in the comments section below.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend 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.