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Investing in Disney: A comprehensive primer and analysis

Part 11
Investing in Disney: A comprehensive primer and analysis (Part 11 of 11)

Must-know factors that could drive future growth at Disney

Disney’s growth prospects

Disney considers itself a creative content company, and creative excellence is the key to its success. It expects to continue to invest both organically and inorganically to pursue this aspect of its strategy. Technology is a critically important part of its long-term growth strategy.

It said it recognizes that the development of new technology provides it with the opportunity—and the challenge—to make it possible for more people to enjoy its content in more ways, at more times, and in more places than ever before. As technology rapidly evolves, a new generation of consumers is quickly embracing all it has to offer, and Disney is expected to provide original and compelling content to meet this growing demand. It believes that access to content on mobile is the single largest technology that has impacted the industry and benefited its consumers. It expects to embrace this technology and use it to increase the distribution of content digitally and on other platforms. The third strategy involves expanding its brands and content internationally.

Disney valuation1Enlarge Graph

Disney has invested in its Parks and Resorts business over the last few years, and harvesting the returns from those investments will be the driver for the next three to five years. It expects the new Avatar Land and MyMagic+ initiatives to be two real drivers for Walt Disney World going forward. Just as Cars Land saw a park-wide benefit in terms of volume and length of stay, Avatar Land will play a similar role in Disney’s Animal Kingdom, as the park will be converted into a full-day experience that extends into the evening, and the company expects to see a positive impact from the overall volume and length of stay. It has also invested to create the biggest shopping village it has in Walt Disney World, called Disney Springs, which is expected to be complete in 2016. The present area will be almost doubled to include 150 shopping, dining, and entertainment venues, featuring some of the world’s most iconic brands and restaurants. The completion of Shanghai Disneyland, which is expected in 2015, will be a growth driver going forward.

In terms of studio entertainment and the strategy with Marvel, Disney expects box office success with sequels of The Avengers, and also sequels featuring the individual characters from the movie. Movies such as Iron Man 3, Thor 2, and the upcoming Captain America: The Winter Soldier and science fiction superhero film Guardians of the Galaxy will fuel growth for the studio up until the first Star Wars movie in 2015 and beyond that as well. Apart from these movies from Marvel, Maleficent (starring Angelina Jolie) and Tomorrowland (which will release this year), and a new sequel for Pirates of the Caribbean in 2015 are expected to benefit the media giant. Disney’s animated movie Frozen, which released during Thanksgiving, has surpassed the $500 million mark in global box office sales, and analysts expect the movie sales to lift Disney’s 1Q 2014 revenue. Disney ended the year with Saving Mr. Banks, the story behind one of its most beloved classics, Mary Poppins, starring Tom Hanks as Walt Disney.

In September 2013, Disney said that two movies from Pixar, The Good Dinosaur and a sequel to the 2003 hit Finding Nemo, will be delayed from the scheduled release in 2014 and 2015, respectively. This will make 2014 the first year since 2005 when Pixar will not release a film.

Disney’s Consumer Products segment is expected to benefit from the Star Wars movie franchise and Marvel. Disney Junior, where it has invested organically in a lot of great content, will see Doc McStuffins, Sofia the First, and also Frozen to drive growth in this segment.

The Disney Infinity video game from Disney Interactive is expected to drive sales in the holiday season. Among the new character additions to the game’s signature Toy Box mode for the holiday season are Rapunzel (from Tangled), Wreck-It Ralph and Vanellope (from Wreck-It Ralph), and Anna and Elsa (from Frozen).

Disney said on its earnings call that it has about $300 million growth in revenue from the continuation of new initiatives. It saw better-than-expected returns from its new initiatives in 2013 and will continue to see the same in 2014, but it doesn’t expect the growth trajectory to be as high as it hoped. The investments that company has made both in terms of acquisitions and organic growth is expected to continue to deliver increased shareholder value in the foreseeable future.

Dividends and buybacks

In fiscal 2013, the company paid dividends of $1.3 billion and repurchased 71 million shares of its common stock for approximately $4.1 billion. The board in December 2013 declared a 15% increase in annual cash dividend to $0.86 per share from the previous year. The dividend is payable on January 16, 2014. Disney Chairman and CEO Robert A. Iger said, “Disney had a great year creatively and financially in fiscal 2013, delivering record revenue, net income and earnings per share for the third year in a row. We are pleased to be able to increase our shareholder dividend by 15% while continuing to invest for future growth.” The company remains committed to returning capital to its shareholders via share repurchase and dividends. Due to a slight reduction in capital expense and continued growth in the company and its bottom line, it expects to repurchase between $6 billion and $8 billion in stock during fiscal 2014.

The company has paid dividends even during the recession and has increased the dividend amount since 2010 after a brief pause in increase in 2007. Disney has $3.9 billion in cash on the books.

Must-know factors that could drive future growth at DisneyEnlarge Graph

Will the stock offer investors a happy ending ?

For fiscal 2014, analysts have estimated Disney’s earnings to be at $3.93 per share, while earnings are expected at $4.50 per share in 2015, as the company has a number of interesting events scheduled in 2015, including the release of Star Wars: Episode VII and the opening of the Shanghai Disneyland theme park. DIS has a P/E ratio of 22.5 and shares went up 50% in 2013.

The stock is a member of the PowerShares Dynamic Media Portfolio ETF (PBS), which seeks to provide exposure to an index of media stocks. PBS is also up 55% for 2013, proving that media stocks are performing well due to new sources of revenue generation such as mobile content, emerging new technology, Internet advertising, and changing consumer habits.

A solid growth in its Parks and Resorts, Studio Entertainment, and Interactive segments is expected boost earnings for the company. Moreover, improved consumer spending in the entertainment sector and expansion in emerging markets is expected to be the positive catalysts for the company going forward. The company could also expand via digital distribution deals on the lines of Netflix or via acquisitions. These drivers, coupled with Disney’s unique portfolio of brands, might be able to prop up revenue in case it sees a slowdown in one of its segments.

On the flip side, media conglomerates like Disney are facing competition from streaming services like Netflix, Hulu, and Amazon that are developing their own original programming and becoming less dependent on licensed content. This might lead to lesser licensing deals and lower affiliate revenue. Success in these original programs may give the streaming services an upper hand in content negotiations. Competition in the Pay-TV space is also increasing, with new entrants such as Google, Apple, Sony, and Intel developing online pay-TV services. This might impact affiliate revenue for big media companies, including Disney.

To find out more about whether Disney can maintain its momentum, see the earlier Market Realist article Stock pick: Can Disney keep up its overall enterprise value?

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