One of the things that I love about Disney (DIS) is how proactive they have been lately. For every industry tilt, the company has swiftly reacted to ensure that they are able to stay ahead of the curve. I've detailed a few examples below, along with an EV/EBITDA relative valuation which shows 10-20% near term upside is not unreasonable, even after the fantastic 40% share price increase in 2012.
The changing media industry. Reaction: Netflix distribution deal
It is no secret that the paradigm is shifting in the media industry to more of an on demand model. Gary Brode of Silver Arrow Capital just wrote an interesting paper about the specifics here. While ESPN is fairly insulated because people still prefer to watch sports live, this must be an area of concern for Disney. No matter how you slice it, affiliate fees and ad revenue will be decreasing from the heyday of live TV. Disney will look to emphasize premium content that people will want access to. The new distribution agreement between Netflix and Disney is a good play - Netflix still has a sizeable subscriber base, even after the pricing debacle last year. While this isn't a Netflix pitch, nor a piece on the media industry, deals like the Arrested Development distribution agreement continue to show that Netflix has clout and the dynamics are changing. I like to see that Mr. Iger is aware of what is happening and is making moves to secure the company's future. I am aware that the Netflix deal is not a panacea, but rather an example of how management is reacting to complex structural problems and aggressively forming new partnerships.
The changing movie industry. Reaction: LucasArts and Marvel acquisitions
I thought the LucasArts and Marvel acquisitions were brilliant. These brands have the ability to pump out movies that can easily gross over $1bn worldwide (Avengers just did $1.5bn). With an endless array of sequels available to draw upon and a global array of loyal fans, Disney will continue to see success. Since the Pixar acquisition, Disney has continued to show a considerable amount of prescience when evaluating studio acquisitions, and LucasArts is another example. There will always be flops, but more often than not, Disney has a hit on its hands. These movies also provide content to tie into the consumer products and theme park assets.
The changing travel industry. Reaction: Launch of Disney Cruise lines and Disney Vacations.
Disney has been making an effort to diversify away from theme parks, bringing the entire vacation experience under the brand umbrella. With beautiful new Disney Cruise Line ships, a non-theme park based resort in Hawaii, and guided services like Adventures by Disney, this company is not resting on their laurels, but rather building the brand across the entire family travel industry spectrum.
Disney has also been seriously reinvesting back into their theme parks. The chart below shows where they spent their capex in FY 12.
Source: Disney 10K
Cap rates have continued to decrease across the hotel properties, as families are willing to pay a premium for the all-encompassing experience you get when staying at a Disney branded resort while attending the parks.
The changing customer demographics. Reaction: Big push into Asia
One of the big advantages of the Disney brand is that it easily transfers across cultures. With a new park opening in Shanghai in 2016, a park in Hong Kong, and a park in Tokyo, Disney had clearly made Asia a priority. The global theme park footprint looks far from over-saturated, with plenty of expansion opportunities available in the future.
On a P/E basis the stock seems to be fairly priced, but because this company is so diversified I have taken a different approach and weighted the divisions by FY12 revenue, taken the industry average EV/EBITDA ratios, and come up with a weighted sum for both the industry and Disney. As one can see, Disney is currently trading at a discount to the industry's weighted average. As an industry leader with a great balance sheet and avenues for growth on the horizon, I would argue that Disney should be trading at a premium, not a discount. $55-60 seems appropriate in the near term. (Industry averages from Jan 2012, sourced at Damodrian Online.)