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Summary

  • Disney still has a lot of growth potential in its franchises and in its theme parks and resorts.
  • Disney owns many franchises that are worth more than their values on the balance sheet.
  • Disney’s five-year growth is expected to be 14.7% each year, according to analyst estimates.
  • Based on my estimate, the stock should be worth around $84 per share or $150 billion in market cap.

Disney (NYSE:DIS) is one of my favorite stocks for long-term investing because the company is well-managed, owns many valuable franchises, has wide economic moats, increasing earnings as well as dividends; and has a lot of growth potential even though it is already a mega cap company.

Although the stock is already at its all-time high (see image below), I believe that its underlying businesses (media networks, parks and resorts as well as studio entertainment) will continue to grow over the next decade, which should lead the stock to reach new heights. This assumes that there are no major market corrections that would depress the majority of U.S. stocks such as a recession.

(click to enlarge)Source: Yahoo Finance

I will provide you with my estimate of Disney's intrinsic value (business value), so you may use it as a guide to invest in the company if you like its long-term prospects and are comfortable with its risks.

Understanding Disney's Businesses

Disney is known for its theme parks and resorts (Disneyland, Walt Disney World Resort, Disney Cruise Line, etc.) around the world. However, the company is much larger than its theme parks. Disney is currently the largest entertainment company in the world that operates five types of businesses: 1) media networks, 2) parks and resorts, 3) studio entertainment, 4) consumer products and 5) interactive media. During the latest Q3 quarter, media networks, parks and resorts and studio entertainment contributed to about 91% of the company's total revenues and 92% of the company's operating income (see image below).


Disney's Q3 10-Q Report

Media networks are Disney's most profitable businesses. The company owns Disney/ABC TV Group, ESPN (the largest sports network in the world), ABC Entertainment, ABC News, ABC TV Stations Group, ABC Family and Disney Channels Worldwide. The company earns revenues from advertising fees charged to advertisers and from affiliate fees charged to multichannel video programming distributors (MVPDs) such as cable providers.

Parks and resorts are Disney's second most profitable businesses. The company operates theme parks and resorts in the U.S. as well as in Tokyo, Paris, Hong Kong and upcoming Shanghai (expected to be open in 2015). The company earns revenues from ticket sales, vacation packages, accommodations and visitors' spending on food, beverage and merchandise.

Studio entertainment is Disney's third most important business. The company owns a number of well-known studios, including Marvel, Pixar, Star Wars, Touch Stone and the original Walt Disney Animation Studio. It earns revenues from the distribution of films, music, home entertainment and videos.

Since consumer products and interactive businesses contribute the least revenues to the company, I will not discuss them in detail in this article.

Disney's Intangible Assets and Its Expected Long-Term Growth

Disney's most important assets are its franchises, including all of the characters and stories in Marvel, Pixar, Disney and Star Wars (Iron Man, Thor, Captain America, Avengers, X-Men, Frozen, Toy Story, Cars, Snow White, Darth Vader and many more). These intangible assets are worth much more than their values on Disney's balance sheet because they can be used in films, theme parks, games, videos, comics and merchandise that can generate revenues for Disney for many decades.

Disney's management understands the importance of franchises and has done an excellent job acquiring some of the most valuable franchises (e.g. Pixar, Marvel and Star Wars) in the world. Moreover, the company is constantly expanding its franchises by releasing new films every quarter that often become blockbusters. For example, Frozen is the biggest blockbuster in the past nine months that has grossed over $1.27 billion in revenue, according to Box Office Mojo. Marvel's Guardians of the Galaxy is another recent blockbuster that has grossed over $330 million in revenue, according to Box Office Mojo.

In the latest Q3 Conference Call, Disney's management stated that the company is planning to release Avengers 2 in May 2015, Ant-Man in July 2015, the long-waited Star Wars Episode Seven in December 2015 and Captain America 3 in May 2016. A sequel of Guardians of the Galaxy has also been announced. Since all of these films are very popular franchises, I believe that they will likely become blockbusters that will contribute to Disney's earnings in their respective quarters.

Disney's Long-Term Growth for the Next Decade

In addition to Disney's franchises, the company's revenues should continue to grow over the next decade for these reasons:

  • Media networks' contract rates and advertising revenues are growing.
  • The number of customers going to Disney parks and resorts is increasing.
  • The average spending per customer at Disney resorts is also increasing.

According to the latest Q3 report, media networks' total revenues increased as a result of higher contract rates charged to MVPDs and higher advertising revenues (see image below).

(click to enlarge)
Disney's Q3 10-Q Report

As stated earlier, Disney owns some of the largest media networks including ESPN and ABC. These networks earn revenues from affiliate fees charged to MVPDs and from advertising revenues.

Over the next decade, Disney should continue to earn higher revenues from ESPN, ABC and Disney Channels by charging higher contract rates to MVPDs in order to offset its increasing programming and production costs. Advertising revenues should gradually grow as more advertisers spend more money on Disney's media networks because of its large number of viewers. And media networks' operating income should grow at a low single digit rate that is close to or above the U.S. inflation rate.

Disney's revenues from parks and resorts are also growing because of the increasing number of attendees and the higher average spending per customer. This is shown in the latest Q3 report (see image below).

(click to enlarge)
Disney's Q3 10-Q Report

Over the next decade, Disney's revenues from theme parks and resorts should continue to grow because of the higher ticket prices, increasing number of attendees worldwide and higher spending per customer. Another growth factor is the Shanghai Disney Resort, which is expected to open in 2015.

Wall Street's 5-Year Growth Estimate

According to Morningstar, Disney's five-year growth is expected to be 14.7% each year. Yahoo Finance also provided a similar five-year growth estimate of 15.92% each year.

Disney's Intrinsic Value

I have estimated Disney's intrinsic value based on the five-year growth estimate of 14.7% each year (see image below). I believe this is a reasonable growth estimate, considering that Disney has a lot of growth potential in its franchises and in its parks and resorts. The discount rate is assumed to be 10%. Note that I define the intrinsic value of a company as the present value of its future cash flows plus its current book value/net assets. The book value is added because Disney owns a number of franchises (intangible assets) that are worth more than their values recorded on the company's balance sheet.

Based on my estimate, Disney should be worth around $84 per share or $150 billion in market cap. In comparison, the stock is traded at $89.28 or $153 billion in market cap at the time of writing (Aug 15). This means that the stock is fairly valued or slightly overvalued. Disney's intrinsic value should continue to increase over the next five to ten years as long as the company earns higher revenues, net profits and earnings per share.

Risks to Consider

In investing, we also need to consider the risks in addition to the investment's potential returns.

For Disney, the biggest risk factor is the increasing programming and production costs (e.g. acquiring programming rights for the NFL and NBA) that could impact its media networks' margins. To offset the increasing costs, Disney increases its contract rates charged to MVPDs and passes its costs to its customers. This strategy will continue to work as long as Disney's programs attract a lot of viewers, which is also important to attracting advertising revenues.

The second risk factors are negative economic conditions. Disney's theme parks and resorts will be impacted if the global economy (especially the U.S.) weakens or if the travel industry slows down.

The third risk factors are Disney's studio businesses. Although the company often makes blockbuster films such as Frozen, Avengers and Guardians of the Galaxy, the company's earnings could be impacted in any quarters if any of the large budget movies fail to succeed in their box offices.

The Bottom Line

In conclusion, I believe that Disney is an outstanding company for long-term investing because it owns many valuable franchises and media networks that can generate revenues for the company for many decades and because its theme parks and resorts are attracting more customers each year. The stock should be worth around $84 per share or $150 billion in market cap. If you decide to invest in the company, you can invest in it at around this price or wait until the stock becomes undervalued.

Source: Disney's Long-Term Growth For The Next Decade