The Case For Disney: ESPN, Not Lucasfilm

| About: The Walt (DIS)

The $4B purchase of Lucasfilm studio and its rights to Star Wars is not the reason why I’m suddenly interested in Disney. I don't think that it hurts - because I do think that Disney is a perfect fit - but let’s not kid ourselves: The impact of that acquisition on Disney’s bottom line will likely be very small and that is not the reason you’d be buying shares of Disney anyway.

Common Misconception About Disney

I know that we all think of Disney as the land of Mickey Mouse, Donald Duck, princesses, and all of the other characters that we all learned to love in our childhoods and rekindled because of our kids. And yes, to an extent, Disney does still make money off its TV shows and movies, theme parks and everything else in the Disney empire.

That being said, Disney has been able to grow for decades thanks, in part, to its acquisitions. In 1996, when it purchased ABC and a few other TV networks, I don’t think anyone could have imagined how big a part of that deal would become. However, it is not ABC, the national channel, but rather ESPN, the sports specialized chain, which has been the most significant contributor to Disney's growth. Over the years, ESPN has been able to completely dominate the sports scene, taking its dominance to all kinds of sports, as well as other mediums such as radio, internet, etc, all around the world.

How Big Is ESPN?

ESPN contributed $18.7B in revenues last year, which is nearly half of Disney’s $40.9B! So yes, ESPN is by far the biggest portion of Disney, with the theme parks lagging at $11.8B and film studios far behind at $6.3B. I’ve heard some say that Disney should spin off ESPN but I do think that they complement each other incredibly well. It’s important to understand how critical ESPN is because when you’re looking at Disney, you should not imagine this traditional children centered

How Do ESPN’s Financials Look?

First, here is a look at the stock over the past decade (click to enlarge image):


Disney has been able to increase its dividend in the past few years but it remains under 1.50%, which is probably enough to attract someone who considers dividends important (such as myself) but probably not enough to justify a spot in a dividend portfolio such as the USDP:

Ticker Name Current Dividend Yield 5 year Dividend Growth 1 year Dividend Growth
DIS Walt Disney Co/The 1.2 14.12 50

Strong Fundamental Numbers

Ticker Name Sales Growth (1 year) Sales Growth (5 year) EPS growth (5 year) P/E ratio P/E Next Year Margins growth Payout ratio Return on Equity Debt to Capital Ratio
DIS Walt Disney Co/The 7.44 4.43 13.81 16.72 14.26 3.7 15.63 14 0.17

I am personally very impressed with Disney’s growth in recent years, which should not be shocking when you consider how much growth ESPN has seen. That being said, there continues to be a lot of competition for Disney and with NBC Sports now becoming a top priority and FOX Sports also bringing in quality stuff and a lot of budgets, it’ll be a challenge for ESPN to remain as dominant. That being said, I think ESPN has by far the best product, and the best integration across platforms. If you want to read more about how ESPN became so big, I highly recommend this article from Business Week


I think Disney is a nice fundamental long term play. What are your thoughts on it?

Disclosure: No positions on Disney

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