Since the beginning of the month, Disney (DIS) has been on a sell-off mode. After reaching the 52-week high price of $67.89, the company's share price fell down to $60.50 as investors have been concerned about the bad performance of the company's latest movie the Lone Ranger. When we look at the big picture, Disney is still a "strong buy" with many growth opportunities.
Disney has several sources of revenues. The company makes movies, owns TV networks and operates theme parks and cruise ships in addition to other lines of business such as video games, gift shops and toys.
Disney's $215 million project The Lone Ranger was able to generate $87 million in the US and $142 million in foreign markets, totaling up to $230 million. Considering that Disney only gets to keep about half of the revenues, the movie wasn't exactly a huge success, even though the company could still generate additional revenues from DVD sales and rentals once the movie stops showing in the theaters. Initially, Disney was expected to write off $190 million for this movie but the true number might turn out to be much smaller than that. Many times analysts forget that a movie continues to generate revenues even after it stops showing in movie theaters as it enters into the DVD market. A movie can generate revenues even beyond DVD sales, because a lot of movies make it to TV screens sooner or later, and movie companies collect royalties every time one of their movies are shown on TV.
In the past, Disney used to make lots of movies with low budgets and make a little money in each movie. In the recent years, the company changed its strategy and decided to launch high-budget movies to hit the "jackpot" with a smaller number of movies. This strategy has proved very successful with several blockbusters such as The Avengers which generated $1.5 billion last year, Toy Story 3 which generated over $1 billion in 2010, Monsters University which generated $700 million this year, Cars 2 which generated $560 million in 2011 and Iron Man 3 which generated $1.2 billion this year. Keep in mind that these numbers exclude DVD sales, DVD rentals or any related royalties. For the next couple years, there are several very promising projects in the company's pipeline, such as a new Star Wars movie, Cinderella, Avengers 2, National Treasure 3, Pirates 5 and Planes.
Walt Disney's theme parks and cruise ships are seeing incredibly strong demand across the world. In the last couple years, the global economy hasn't been very strong. However, Disney's theme parks continued to increase their volume and spending-per-customer significantly during this period. This year, the company increased its admission ticket prices but this didn't affect the demand at all, which shows that most of Disney's theme park customers don't even care how much they are spending at these parks. This is very bullish for the company. In fact, Six Flags (SIX) also reported seeing strong numbers this year, which tells me that the bullishness in the theme park business will be here to stay.
A lot of baby boomers are retiring as we speak, and they might become the biggest customer base for these theme parks. After seeing a lot of success in Hong Kong, the company also decided to open a Disney Resort including a Disneyland in Shanghai, China. This park is scheduled to open in 2015. Hong Kong Disneyland generates about $550 million in annual revenues. I would expect Shanghai Disneyland to generate at least that much in revenues.
In the last 4 years, Disney generated a total of $29.58 billion in operating income. Of this amount, $14.33 billion was spent in investments that are expected to fuel growth for the company. Currently Disney has about $3.38 billion in cash and $2.72 billion in long-term investments. Considering how much money Disney earned in the last few years, the company's cash balance is pretty low. This is because Disney's management doesn't like hoarding cash. Rather, the company keeps investing a great majority of its earnings into projects that will keep the company growing.
The analysts expect Disney to keep growing at a double-digit rate for the foreseeable future. In fact, if the company can meet the analyst estimates (which it often does) it will be earning $5.08 per share by 2016, which gives it a forward P/E ratio in low-teens.
There is really no reason for investors to punish a company like Disney. We are looking at a company that has been growing its revenues at every business segment for the last several years. In the last 4 years, Disney's earnings grew from $3.30 billion to $5.98 billion and investors are almost treating the company as if its growth rate is flat. When investors realize the true value of the company, they will be investing in Disney in large numbers.