Investors in Walt Disney (DIS) had a great 2013, seeing additional momentum in the final trading days of the year following by an upgrade from analysts at Guggenheim. Optimism has also been driven by the successful movie "Frozen" which so far has raked in $640 million across the globe.
I feel that analysts are chasing the bandwagon after significant momentum. While I do like the long term prospects of the business, I do not belief that current levels represent a great entry point for long term investors.
Therefore I remain optimistic for the long term, yet I stay on the sidelines for now.
Guggenheim Turns Bullish After This Year's Momentum
Last week, analysts at Guggenheim came out with a big upgrade, upgrading shares from "Neutral" to "Buy". Analyst Michael Morris raised the price target by ten dollars to $87 per share, suggesting some 17% upside from levels before the upgrade was released.
Momentum for 2015 and 2016 catalysts include products and films from Marvel, Pixar and Star Wars according to analyst Morris. Thor 2 and the Frozen family have outperformed in the first quarter, strengthening the content story currently.
Consensus estimates could further increase on Netflix (NFLX) revenues, consumer products growth internationally and the introduction of new characters as well as stronger broadcasting performance.
While the Shanghai park could weight on performance in the period 2014-2016, revenues of the parks business are expected to grow rapidly from $15.2 billion in 2015 to $20.3 billion by 2018. This aggressive growth is seen on the back of the opening in Shanghai in 2015.
In November, Disney released its full year results for the fiscal year of 2013. The company operates with a net debt position of $10.36 billion. Yet the firm has sufficient liquidity with $3.93 billion in cash and equivalents.
Full year revenues for 2013 rose by 6.5% to $45 billion as earnings were up by 8% to $6.1 billion.
Trading around $76 per share, the market values Walt Disney at $134 billion. This values equity in the firm at 3.0 times annual revenues and 21-22 times annual earnings.
The annual dividend of $0.86 per share, provides investors with a 1.1% dividend yield.
Performance In Recent Years
Long term holders in Walt Disney have seen solid returns driven by strong returns in 2012 and 2013. Between 2004 and 2011, shares have largely traded in a $20-$40 trading range. Following the solid momentum in 2012, and year to date returns exceeding 50% in 2013, shares currently trade at all time highs of $76 per share.
Over the past four years, Walt Disney has increased its annual revenues by a cumulative 18% to $45.0 billion. Revenues rose by some 55% in the same period to $6.1 billion. Earnings per share growth saw an additional boost as the company retired roughly 7% of its shares outstanding in the meantime.
Implications For Shareholders
As outlined in a recent investor presentation, Walt Disney is looking with confidence towards 2014 and beyond. Investors have often looked forward to the opening of the Disneyland theme park in Shanghai, expected to become the second most visited park of the conglomerate. The planned opening in 2015 is expected to drive growth, with expected attendance seen higher than the 28 million visitors which visit Disney's park in Tokyo each year.
Yet parks is only a small portion of Disney's entertainment conglomerate. Studio's are stepping up as well. Following the acquisition of Lucas, the Star Wars Episode VII is seen in 2015. Besides acquiring Lucas, the firm also bought Marvel a few years ago for $4 billion, marking strong and growth-resulting creative acquisitions. None of such comparable deals are in the pipeline however at the moment. These introductions are crucial as they could provide revenues for decades to come through royalties, merchandise and theme park visits.
With these favorable developments continuing, Disney focuses on three key parts. This includes creative excellence through organic and acquisition-based growth. The embrace of technology, for digital content delivery and the global reach are other key factors of the growth strategy.
Late in October, I last took a look at Walt Disney's prospects following other bullish coverage, this time from analysts at FBR Capital. I concluded that investors were already late in the game in my opinion, upgrading shares, then trading around $70 per share.
The significant momentum so far this year, limits the potential of the shares in the short term in my opinion, although I like the long term growth prospects of the business. The stable cash flows of the cable business support the valuation, given the volatile performance of the studio entertainment business in the short term.
Yet don't look too much into that, as the long term success of the entertainment business drives long term attendance at parks and royalties. For that reason, don't read too much into a "failed" movie costing a $100 million orso, just like the failure of the "Lone Ranger" as the company has sufficient financial capacity to take these hits. Note that these occasional failures are made up by other blockbusters like "Frozen", the movie passed the $500 million mark in worldwide ticket sales in the aftermath of Christmas. The most recent report shows that sales have already totaled $640 million, making it the second best movie after Lion King.
Despite the recent dividend hike, the yield is not too impressive. In a positive sign, Disney earmarked $6 billion for repurchases in 2014, sufficient to retire 4-5% of the current share base. Arguably 2013 would have been a better year to time these purchases, instead of buying at all time highs at the moment.
While 2015 and beyond will be good, notably on the Shanghai opening, I see few reasons for outperformance next year at this valuation, as the long term growth story remains intact. After trading within a $20-$40 range for a decade, don't get fooled by the "Disney" premium but await better entry opportunities going forwards.