Don't Listen To The Analysts, Buy Disney

| About: The Walt (DIS)

On Tuesday, B. Riley & Co. downgraded shares of Walt Disney (NYSE:DIS) from buy to neutral, sending shares down 1.5%. With a $73 price target, the analyst believes that strong fundamentals are fully priced in and that the money has been made in Disney. I respectfully disagree, as I believed Disney has tremendous growth prospects over the next several years with a tremendous slate of movies at its studio, which should provide a halo effect into other businesses, like the theme parks. In 2014, I expect EPS to grow by double digits to about $4.00, giving the stock a forward multiple of 17.5x.

While this might seem like a stretched valuation, Disney is not a 2014 play. It is a 2015-2020 story where earnings growth should maintain a double digit pace. Disney has an unmatched house of brands thanks to its transformative acquisitions of Marvel and Lucasfilm, which are just now starting to pay dividends. Disney is in the process of building the most consistent and profitable movie studio in the world with a 2015 slate that will set records. In 2013, we have seen "the Avengers effect" with spin-off movies Iron Man 3 and Thor 2 growing 25% on their predecessors. Most impressively, Thor 2 will be up 75% internationally on its predecessor (data here).

Disney is building a Marvel cinematic universe that will churn out two films a year with The Avengers reuniting in 2015, a film that could hit $2 billion worldwide thanks to the high growth international market, especially China where Disney is making tremendous inroads. Iron Man 2 made $8 million in China, and Iron Man 3 made $121 million in China thanks to a generally bigger market and a villain that was targeted toward the country (data here). By 2020, China's box office could be as large as the U.S., and given how Disney is positioning its Avengers franchise, the stock will rally dramatically.

While it is becoming clear how wise the Marvel deal is, Disney is just beginning to see benefits from its Lucasfilm deal with the next Star Wars film poised to open Christmas 2015. Between the main films and planned spin-offs, we will likely see Disney develop a universe similar to its approach with Marvel, which will provide steady annual cash cows for the studio. Between the Avengers 2 and Star Wars 7, Disney will be releasing two billion dollar movies in 2015 that are building up to annual franchises to provide relatively stable cash flows as far as the movie business is concerned.

At the same time, Disney has the most beloved animated studio in the world in Pixar, which has yet to release a movie that does not open in first place. Pixar is also scaling up its production from one film a year to three every two years, which will provide incremental cash flow. Concurrently, Disney Animation Studios is entering a second renaissance. After major hits with Tangled and Wreck-It Ralph, Frozen set a Thanksgiving opening record and should close with more than $250 million (data here). In the highly profitable and competitive animation market, Disney is the undisputed king.

The boom at its movie studio increases licensing fees for toys, especially as its Marvel and Lucas franchises are built for merchandise sales. They also keep the roster of Disney characters fresh and popular, which will drive attendance at its theme parks. Thanks to the company's film success in China, there is tremendous potential for theme parks in that emerging country. Disney may very well be the best play on the Chinese consumer.

Disney is at a point where its Marvel universe will generate an average of $1.25-$1.5 billion at the box office annually while an annual Star Wars movie (half spin-offs, half along the main timeline) should do $700-$900 million on average. Concurrently, Pixar and Disney Animation are consistently starting to combine for $800 million-$1 billion. These three segments will be easily generating $500 million in earnings at the box office before accounting for home video and digital sales, licensing, and increased attendance at the theme parks.

Lions Gate (LGF) shares have tripled since starting production on The Hunger Games, which has turned into a massive franchise. Disney however has multiple equivalents of The Hunger Games, which gives it tremendous flexibility if one division or franchise underperforms. When Catching Fire opened slightly below bullish expectations, the stock fell by over 5%, but when it held better than expected over Thanksgiving, the stock saw a 3% pop. Disney is not nearly as dependent on one franchise, which means it will be less volatile when a film under or over performs. Moreover, long-term investors should not play the stock over week-to-week box office data, instead focusing on the long-term strategic franchise building at Disney.

At the same time, Disney maintains a foothold on the lucrative U.S. sports market with ESPN, which continues to lock up content deals to maintain an enduring moat against upstart sports channels. With Monday Night Football, college football deals and multiple nights of baseball, ESPN will remain the go-to place for sports for many years. With a lower proportion of DVR viewing, ESPN will continue to grow ad revenue and remain a great piece of Disney's business.

I expect ESPN to grow revenues by about 5% over the next 5-7 years on the back of strong advertising revenue. Disney does still own ABC, which has been struggling with profits down 18%. However, over the next 5 years, the network will be negotiating retransmission fees with cable carriers. This summer's CBS (NYSE:CBS) Time Warner (TWC) fight should remind all that content producers, not the cable companies, are in the driver seat. With increased competition from cable, I expect ABC to lag the rest of Disney's portfolio, but retransmission fees should keep profits stable or marginally higher.

Most media companies are fortunate to have one mega franchise (Paramount and Transformers, Universal and Fast and Furious, Fox and X-Men, Sony and Spider-Man). Even film goliath Warner Bros. only has two with Batman and plans to recharge Harry Potter. Disney has an unparalleled stable of characters with Marvel, Star Wars, Pixar and Disney Animation, which should make Disney the leading studio for several years with consistently strong box office performance. The major risk in Disney is not in its competitors but in itself. The major risk to the Disney franchises are that the company makes bad movies and destroys their value.

Investors do need to follow this risk, but right now, I am comfortable with Disney's disciplined approach to content creation given its track record. Pixar in its twenty years has never released a movie that failed to hit first place, and the films have been universally well received by critics and families. Disney recognizes that a bad movie can have ripple effects through the entire planned universe. Given Pixar's track record and the fact that the Marvel films have maintained a consistent level of quality, I am confident that Disney will maintain a disciplined approach to quality, ensuring that its franchises maintain their value. As with any content company, quality is the key risk, and for Disney, this is a risk I am comfortable with.

To sell Disney now is to sell just before the company's long-term planning pays dividends. As it rolls out its mega franchises in 2015, we should see a major uptick in studio profitability, which will carry over throughout the decade. With a 7-year growth rate between 12% and 15% on the back of its studio, I would be a buyer of DIS until $80 or 20x earnings. Disney is the best growth stock in the Dow 30 and one of the best in the entire market. Don't sell out now; the best is yet to come.

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.