The 'Retire Young' Portfolio: This Entertainment Giant Will Add Value

May. 1.13 | About: The Walt (DIS)

After introducing Monster Beverages (NASDAQ:MNST), Statoil (NYSE:STO), American Express (NYSE:AXP) and Wells Fargo (NYSE:WFC), it's time to introduce the fifth company in our "Retire Young" portfolio. This time, I will be making an exception to the general rule of this portfolio. Normally, it is very rare for me to buy a stock after it has already seen a rally because stocks usually provide more value to investors when they are bottoming than when they are topping. When a stock is topping, there is a chance that it might be overbought and this can usually form bubbles. Keep in mind that stocks rarely move upwards relentlessly for a long time and that even the best stocks can have pullbacks once in a while. After having said that, I will introduce a new company to the "Retire Young" portfolio that is a little different from the other companies in the portfolio. We are talking about a company that's been rallying relentlessly without any major pullbacks for the last 2 years. Yet, I still see a lot of value in this company. Let's find out more about this company and why I'm adding this company to the portfolio.

Introducing The Walt Disney Company (NYSE:DIS)

So, what's so special about The Walt Disney Company (also known as "Disney") that I am making an exception for this company? More specifically, how can a company's share price keep going up without any major pullbacks and still offer a good value at the end of 2 years? After hitting a bottom of $29 in 2011 when the market was deeply worried about the crisis in Europe (more specifically Greece, Italy and Spain), the company's share price has been moving upwards almost non-stop. Currently, Disney trades for $63 and there is still a lot of room to go.

Most people know Disney for 2 things: cartoons and famous vacation spots like the Disneyland and the Disney World. In fact, the company is much more than that. Under the leadership of Bob Iger, Disney has been doing some great things for the investors of the company. The company now operates in many different industries including, but not limited to, TV operations, movie production, cruise ship operations, hospitality management, toys and video games.

Last year was the best year in the company's 90-year history. Disney was able to report net income of $5.7 billion, which represented $3.13 per share and a growth of 24% compared to 2011. The company generated $42.3 billion in revenues. Disney's 2012 results were record numbers for more than one metric. The company's portfolio of many products and industries was highly successful, and every business unit of Disney performed better in 2012 compared to 2011. This is a very difficult achievement to accomplish in companies as large as Disney.

Sky is the Limit

Many of the well-known media brands across the world are now owned by Disney. Apart from the company's own brand Disney, it also owns ESPN, ABC, Pixar, Marvel, Lucasfilm and it is likely to continue acquiring strong brands in the future. The company owns tens of TV channels in many different countries and it continues to add more TV channels to its portfolio. Disney's movies are very well-known and they attract people from all ages and walks of life. So far, the company has produced 75 movies that passed $100 million in the box office. In 2015, Disney is expected to launch a new Star Wars movie, which is likely to earn back all the money it spent on acquiring Lucasfilm. The Avengers was able to earn back the money Disney spent on acquiring Marvel as it became the 3rd most watched movie in history. The newest Iron Man movie is also seeing very strong demand across the world. Moreover, with the launch of Disney Fantasy, the company now has 4 cruise ships on the sea. This is another profitable line of business for Disney and the number of Disney's cruise ships is likely to increase over time.

Analyst Estimates

Of the 23 analysts covering the company, 15 rate it as either "strong buy" or "buy" whereas none rate it as sell. Very few companies can brag about something like this. The analysts expect Disney to earn $3.45 this year, $3.90 in 2014, $4.37 in 2015 and $4.93 in 2016. Compared to last year's $3.13 per share, we are looking at a growth rate of 58% in 4 years. Given Disney's overly ambitious leadership and past growth rate, it wouldn't surprise me if the company was able to beat even these strong estimates. Disney is looking at a forward P/E of 13 for 2016, which may sound high at a time when some companies trade for single-digit P/Es; however, Disney continues to be a solid growth play. When companies are growing at a double-digit rate, their relatively high P/E ratios don't bother me as much as companies that are barely profitable and still trading for high valuations.


We are going to add 200 shares of Disney at $62.75 per share. Then we will sell covered calls with a strike price of $65.00 expiring in July with a premium of $1.42. By July, if the share price passes $65.00, we will make 6% in 2 and half months. If the share price closes below $65, then our return will depend on the price of the stock at the time. Of course, we are going to hold this stock in the long term regardless of whether the strike price is met or not. If the strike price is passed by July, we can always buyback the call and keep rolling.

Currently, our portfolio has 200 shares of Monster Beverages, 400 shares of Statoil, 100 shares of American Express, 300 shares of Wells Fargo and 200 shares of The Walt Disney Company. In the following days, we are going to add 6 or 7 more companies to this portfolio.

Disclosure: I am long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.