Seeking Alpha
Long/short equity, research analyst, tech, macro
Profile| Send Message| ()  

Introduction

Walt Disney (DIS) is an entertainment company with a diversified portfolio of businesses. I anticipate the company to grow earnings, making it a compelling investment opportunity going forward.

Qualitative Analysis

Source: Information pertaining to Walt Disney came from the shareholder annual report

Walt Disney operates five subsidiaries: Media Networks (Disney Channel, ESPN, etc.), Parks and Resorts (Disney Land), Studio Entertainment (The Avengers), Consumer Products (physical Disney products) and Interactive media (video games).

(click to enlarge)

The fastest growing revenue categories were the Parks and Resorts division. Net income grew most from the Parks and Resorts, and Studio Entertainment divisions of the company. Parks and Resorts grew in net income by 22% over 2011. Walt Disney's primary focus is investment into its parks, resorts, and other properties representing $3.7 billion/80% of the cash spent on investment activities. The growth in revenues and net-income from Parks and Resorts will succeed, and is the biggest revenue growth category for the company going forward.

The income elastic demand of movies is 3.41. This means that for each percentage increase in income, consumption of movies will increase by 3.41 times. This is an important indicator as Walt Disney's net income from Studio Entertainment (movie franchises like the Avenger, Iron Man) will continue to grow and will represent a larger percentage of net income going forward. In 2010, income GDP per capita worldwide was at $7,329; by 2020, this is forecasted to be at $9,388. Income on a world-wide basis is likely to grow by at least 28% over the decade; this improvement in income will make for a larger number of movie theater visits, and will contribute to Walt Disney's Studio Entertainment growth by approximately 95% over a 10-year period. The economic outlook for Walt Disney remains strong as consumption from the emerging middle class will contribute to Walt Disney's bottom line, by a large margin.

(click to enlarge)

I remain optimistic on the company going forward; its investment into real estate and properties will improve the tangible book value on the company's balance sheet, it will also generate substantial returns on investment. Walt Disney will be opening more resorts/parks in China. With its recent success in Hong Kong, Walt Disney has established a strong track record in Asian markets.

Walt Disney's business model is powerful. It opens its entertainment and television network (Disney channel) in emerging markets, this acquaints the audience with the Walt Disney brand, then up-sells the audience to a Walt Disney theme park (this is what happened in South America and China). This synergy is what makes Walt Disney a powerhouse in the entertainment industry.

Walt Disney is able to borrow cash from banks, due to the sheer amount of property and land assets on the balance sheet. Walt Disney can expand capital expenditures on its Disney Theme Park/Resorts at any time, which could boost net-income growth well above the forecasted figures I have presented.

Walt Disney's business model is likely to succeed because of a strong cash/asset position, improving economic outlook, international growth, along with the added value of the brand.

Walt Disney competes for market share with companies like: Time Warner (TWX), DirecTV (DTV), Viacom (VIAB), CBS (CBS), among many others.

Technical Analysis

Walt Disney has been on a continuous uptrend since January 2012. I anticipate this uptrend to continue throughout 2013.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Average. The stock is in an uptrend (higher highs, higher lows); this further supports the bullish thesis on the company stock.

Notable support is $42.00, $46.50, and $49.50 per share.

Notable resistance is $52.50, $53.15, $61.00

Street Assessment

Analysts on a consensus basis have moderate expectations for the company going forward.

Growth Est

DIS

Industry

Sector

S&P 500

Current Qtr.

-3.80%

134.50%

9.60%

9.30%

Next Qtr.

29.30%

N/A

30.00%

14.60%

This Year

11.10%

20.60%

31.70%

7.10%

Next Year

12.90%

32.50%

-15.50%

12.90%

Past 5 Years (per annum)

9.57%

N/A

N/A

N/A

Next 5 Years (per annum)

11.41%

18.30%

14.17%

9.14%

Price/Earnings (avg. for comparison categories)

15.02

-40.8

-0.67

11.17

PEG Ratio (avg. for comparison categories)

1.32

-3.11

0.52

1.18

Source: Table and data from Yahoo Finance

The company shows reasonable growth as analysts on a consensus basis have a 5-year average growth rate forecast of 11.41% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.72

0.55

0.93

0.68

EPS Actual

0.8

0.58

1.01

0.68

Difference

0.08

0.03

0.08

0

Surprise %

11.10%

5.50%

8.60%

0.00%

Source: Table and data from Yahoo Finance

The average surprise percentage is 6.3% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 0.65

31.03

2004

$ 1.08

20.88

2005

$ 1.21

19.94

2006

$ 1.65

18.73

2007

$ 2.33

14.76

2008

$ 2.34

13.12

2009

$ 1.78

15.43

2010

$ 2.07

15.99

2011

$ 2.56

11.78

2012

$ 3.07

17.03

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2008-2009 period revenues dropped as the company was affected by the great recession. Once the United States economy exited the recession in 2010-2011 the company's earnings have improved.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart, we can conclude that the business is cyclical and is affected by macroeconomics. Therefore, the largest risk factor to Walt Disney is the slowing of international gross domestic product growth. So as long as the United States economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.

(click to enlarge)

Source: Forecast and table by Alex Cho.

By 2018, I anticipate the company to generate $6.04 in earnings per share. This is because of earnings growth, international expansion, improving global outlook, and cost management.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5 years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on September 30th of each year.

(click to enlarge)

Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

DIS currently trades at $50.97. I have a price forecast of $60.94 for September 30th, 2013. The stock is below value, and I anticipate a recovery in value throughout 2013.

Short Term

Over the next twelve months, the stock is likely to appreciate from $50.97 to $60.94 per share. This implies 19.5% upside from current levels. The technical analysis indicates an uptrend, further backing the buy-thesis on the stock.

Investors should buy DIS at $50.97 and sell at $60.94 to pocket short-term gains of 19.5% in 2013.

Long Term

The company is a great investment for the long term. I anticipate DIS to deliver upon the price and earnings forecast despite the risk factors (competition and economic environment). Walt Disney's primary upside catalyst is international expansion, rising incomes of the middle class, and cost management. I anticipate the company to deliver upon my forecasted price target of $108.02 by 2018. This implies a return of 112% by 2018. When factoring back in the dividends (based on the table below), the company will generate a combined return of 125%. This rate of return is exceptional considering the moderate level of risk (5-year beta of 1.2).

Year

Dividend Yield @ $50.97 per share

Cumulative Total

2012

1.44

1.44

2013

1.60

1.60

2014

1.79

3.39

2015

1.99

5.38

2016

2.22

7.60

2017

2.47

10.06

2018

2.75

12.81

Source: Forecast and table by Alex Cho, dividend data from shareholder annual report

A higher yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 calls at the $52.50 strike. The call premiums trade for $5.70. The price forecast for the end of 2014 is $68.33. The rate of return if the calls expire at $68.33 is 177%. The breakeven point is 58.20.

DIS has a market capitalization of $90.3 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

Investors should remain optimistic on Walt Disney, the business model works; it grows, and is well-managed. What more could investors ask for?

The conclusion remains simple: buy Walt Disney on long-term growth.

Source: Walt Disney Is A Compelling Investment, For Growth Investors