Investment Thesis – Walt Disney Co (DIS)

“The Walt Disney Company, incorporated on July 28, 1995, is a worldwide entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The media networks segment includes cable and broadcast television networks, television production and distribution operations, domestic television stations, and radio networks and stations. The Company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The studio entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. The Company also develops and publishes games, primarily for mobile platforms, books, magazines and comic books.” – Reuters.com

Disney business segments (by operating income) as per Annual Report 2017:

  • Media Network (46.71%)
  • Parks & Resorts (25.54%)
  • Studio Entertainment (15.94%)
  • Consumer Products & Interactive Media (11.8%)

Historical Growth data

  • Stable revenue and EPS growth over past 5 years
  • Large FCF available (FCF yield = 5.9%) and consistent growth over last 4 years
  • Dividend yield of 1.7% with average dividend payout ratio (earnings) of 30% which is very safe
  • Consistent dividend growth over past few years but slowing growth (dividend growth of 25% average before 2015 and 8% average after 2015)

Competitive Advantage (Moat)

  • Efficient Scale: the ESPN network
  • Intangible Assets: Brand name of Disneyland theme parks, distributive rights to Disney, Marvel, Pixar, and Lucasfilm products (films, games, merchandise)

Future Growth potential

  • Has been able to churn out hits in box office (Marvel universe, Star Wars films, etc) which can translate into more revenues in all the other segments of the business
  • Huge size and FCF makes acquisitions at the very least safe (e.g. recent acquisitions of 20th Century Fox and BAMTech)
  • Huge success of theme parks and ongoing investments into them continues to be high quality attractions for visitors
  • Entrance into paid streaming services is potentially highly profitable and can have synergies with ESPN but has risks of competition from similar services like Netflix

Micro-related risks

  • FY17 Total Debt/FCF = 4.42 which is slightly higher than threshold of 3-4
  • Long-term debt has been growing substantially for the past 5 years

Macro-related risks

  • Global economic downturn can negatively affect demand for Disney’s products
  • Challenges to Disney’s ESPN network in the form of cord-cutting due to increasing popularity of off-television live sports programming platforms (Amazon and Twitter)
  • Challenges to Disney’s niche in providing child-friendly programming (mainly from Netflix)
  • Challenges by Comcast stealing away Sky from the Disney-Fox deal would reduce the benefits of the deal

Current valuation

  • PE ratio of 13.98 (based on P=$98.54, E(TTM)=$7.05) is very low
  • Lowest PE ratio in 7 years
  • PE ratio lower than industry (25.73) and sector (18.34)
  • PE ratio lower than S&P500 PE of 25.7

Verdict

  • Disney faces serious challenges from the ESPN network (which makes up majority of operating income) and high uncertainty in the Disney-Fox deal, which probably resulted in the very low PE valuation. However, I consider the company to have a strong brand moat and high potential from box office hits and theme park investments. The safe dividend payout ratio and consistent dividend growth is also a strong positive. Will initiate a large position in Disney and continue to accumulate if prices continue to fall.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s