By Matt Doiron
Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, has recently been significantly increasing its stake in Walt Disney (DIS); the entertainment and media company was recently the fund's second-largest holding by market value (see Griffin's stock picks). We track the activity of hundreds of other hedge funds and notable investors, as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), but also like to take into account what specific funds have been doing recently. While blindly following hedge funds isn't always wise, we think picks such as this can serve as initial investment ideas for further research.
Disney's most recent fiscal quarter, the second of its fiscal year, ended in March. Financial results were quite strong- revenue rose 10% versus a year earlier, including growth in all five segments of the company's business. Cost growth was held in check, and as a result Disney's pretax income grew by 21% (with a lower effective tax rate also contributing to earnings growth). As with revenue, improvement occurred in all segments: small improvements occurred in the media segment, by far the largest source of operating income (this segment includes ABC and ESPN) with the parks segment's operating income up over 70% and the film business recording a gain rather than a loss.
The trailing P/E of 19 is fairly close to where Disney's peers in media and entertainment trade. The business is growing nicely as it is, as we've discussed, and has a "crown jewel" asset in ESPN. Disney continues to monetize the library of content it acquired from Marvel quite well, and it is clearly going full-throttle in utilizing its new Lucasfilm acquisition, with very aggressive plans to make movies centered on the Star Wars franchise and likely other initiatives to help it win preteen and teenage boys around the world- just as Disney Princesses have proved a powerful asset among girls of similar ages.
News Corp (NWSA) and Time Warner (TWX) also have significant cable assets, making them peers for the most profitable portion of Disney's business. News Corp, which is scheduled to be broken up into two companies, carries a forward earnings multiple of 16 (even with Disney's forward P/E). With that company performing nicely as well, and potentially realizing efficiencies from a breakup, we think that investors should be considering News Corp as well. Time Warner's earnings were up over 20% last quarter compared to the first quarter of 2012, but revenue was flat and so we'd be concerned about how sustainable these earnings numbers are. At 17 times trailing earnings it seems like a less attractive opportunity.
We can also compare Disney to Comcast (CMCSA) as the owner of NBC Universal and to CBS (CBS). These two stocks carry trailing P/Es in the 17-19 range as well. CBS gets a bit of a boost among investors for its potential to spin out its U.S. billboard unit as a real estate investment trust. With it too reporting decent numbers in its most recent quarterly report, special situation investors might want to do more research on how much shareholder value could be created from the spin-out. Comcast falls in the category of peers whose recent earnings growth has been much more impressive than the revenue numbers. However, analysts do price the stock at only 14 times forward earnings estimates, a small discount to Disney and News Corp, and while we wouldn't take their projections at face value Comcast could be worth further research.
None of these companies are pure value stocks, though all have recently delivered high growth at least on the bottom line. We're interested in the special situations offered by the News Corp breakup and the potential CBS spin-out, and with Disney not priced at too much of a premium to similar companies despite its strong mind share it could be worth thinking about as a growth stock.