Walt Disney: Long-Term Appeal Remains, But Current Valuation Is On The High Side

| About: The Walt (DIS)

Shares of The Walt Disney Company (NYSE:DIS) saw a modest correction following the release of its third-quarter results on Tuesday after the market close.

Shares have already increased by a third so far in 2013. While the long-term prospects remain undoubtedly rosy, I would hold off making an investment at the moment as I see few catalysts for a strong rally going forward.

Third-Quarter Results

Walt Disney generated third-quarter revenues of $11.58 billion, up 4% on the year before. Revenues came in a little soft compared to consensus estimates of $11.64 billion.

Operating earnings rose by 4% to $3.35 billion, while net income rose by a percent to $1.85 billion. Diluted earnings per share came in unchanged at $1.01 per share. Restructuring and impairment charges totaled $60 million, or $0.02 per share.

Adjusted earnings, which excludes the restructuring charges, came in at $1.03 per share, ahead of consensus estimates of $1.01 per share.

CEO and Chairman Robert A. Iger commented on the developments during the quarter, "We are pleased with the results we delivered in the third quarter. We are confident that our strategy of creating high-quality branded content positions us well for the future."

Looking Into The Results

Walt Disney saw strength across most of its divisions. Large divisions including the media networks and the park and resorts business performed well.

The studio entertainment business fell out of tone, reporting a 2% decline in revenues, while operating income fell by 36% to $201 million. The pre-release marketing costs of "The Lone Ranger," which cost $250 million in total to produce, is largely to blame for this.

Media revenues were up by 5% to $5.35 billion as an 8% increase in cable networks revenues offset stable revenues in the broadcasting business. A solid performance at ESPN and Domestic Disney channels more than offset softness at ABC Family.

The park and resort business had a solid performance as well as revenues rose by 7% to $3.7 billion, while operating earnings rose by 9% to $689 million. Increased attendance and higher guest spending were boosting the performance.


Walt Disney ended the quarter with $3.9 billion in cash and equivalents. The company operates with $15.0 billion in total debt, for a net-debt position of around $11.1 billion.

Revenues for the first nine months of the year came in at $33.5 billion, up 6% on the year before. Net earnings rose by 7% to $4.74 billion. Full-year revenues could come in around $45 billion, while earnings could top around $6 billion.

With shares exchanging around $66 per share, the market values Walt Disney at $118 billion. This values the operating assets of the firm at 2.6 times annual revenues and 19-20 times annual earnings.

Walt Disney currently pays an annual dividend of $0.75 per share, for an annual dividend yield of 1.1%.

Some Historical Perspective

Under command of Robert Iger, Walt Disney has created a lot of value for its shareholders in recent years. Shares traded at lows of $15 in 2009 and have seen a steady recovery ever since. Shares are trading around fresh all-time highs of $67 per share.

Between the fiscal year of 2009 and 2012, Walt Disney has increased its annual revenues by a cumulative 17% towards $42.3 billion. Net income rose by 72% to $5.7 billion.

Investment Thesis

I have been a long-term bull about Disney's prospects for a while. Essentially you have the cable properties, which perform according to plan. The volatile performance of the studio entertainment business, the unit which produces the films, creates long-term cash flows for consumer product sales and theme park revenues.

As such investors should not be spooked about the headline of a $160 to $190 million loss to be taken in the coming quarter. The poor performance of "The Lone Ranger" movie, will shave off merely 10% of Disney's quarterly earnings. Disney has plenty of financial resources to absorb such setbacks, and real film profits are understated by not taking the incremental benefits into account. Some of these benefits last for years, or even decades for some blockbusters.

Back in November of 2012, I last took a look at Disney's prospects. Trading in the high 40s at the time, I remained bullish on the long-term prospects supported by diversified operations, strong assets and stable long-term cash flows, making it an ideal investment. Shares have risen more than 30% ever since, exchanging hands at $66 per share, valuing them at 20 times projected earnings for the year.

While I remain optimistic for the long term, there are few reasons to expect a spectacular short-term performance. A "full" valuation and a relative low dividend yield limit the current upside to my opinion.

While long-term returns should continue to be solid, I would not be a buyer at today's elevated levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.