Disney: What A Comeback

| About: The Walt (DIS)

The last couple weeks, I was somewhat upset with the performance of the Walt Disney Company (NYSE:DIS). For about 20 trading days in a row, the company underperformed the market because some investors were worried about the bad performance of Disney's The Lone Ranger movie and others were concerned about emerging competition to the company's ESPN network. After falling all the way to $60, the stock price has recovered up to $66 in just 5 trading days, and there is still upside left.

It turns out that Disney is making a larger than expected repurchase of its shares in the next year. The company is increasing its repurchase rate from $3-4 billion to $6-8 billion. Such a large purchase would reduce Disney's outstanding share count by close to 6%, which adds value to the shareholders.

In my last Disney article, I already explained how Disney's movies are far more profitable than people give it credit for. Even some of the worst performing movies in the box office can turn into profitable projects for Disney because the company has multiple ways to milk a movie including but not limited to licensed products (such as toys or baby clothes), TV shows, DVD sales, DVD rentals and other avenues. It's very rare that Disney doesn't make a profit on a given movie. Of course, once in a while the company will write-off some movies as a loss for tax purposes; however, if we look at the overall picture, many of Disney's movies continue to generate income even years after they are released.

So far, Planes generated $125 million in revenues on a budget of $50 million and Monsters University generated $727 million on a budget of $200 million. Both movies are still being shown in many countries around the world, including the US.

Movie theaters are being added daily in China and the country's box office volume is expected to pass the box office volume of the US by the end of the decade. There is a strong growth in the country and Disney is one of the most popular movie brands there. Currently, Disney is building a giant Disneyland in China in order to capitalize the growing demand in the country. Once Chinese become more familiar with Disney characters, they will be more likely to visit Disneyland to enjoy rides of the characters they have come to love. Speaking of China, Disney signed a partnership in the country with Tencent, which is basically China's Netflix (NASDAQ:NFLX). This deal will increase the Chinese exposure to Disney products and generate additional income for the company. Tencent's business model is a little different from Netflix though. In addition to offering flat-fee services, the company also offers the ability to rent Hollywood movies on a per-movie basis. This is particularly popular with newly launched movies that may not be offered in the regular subscription package. As Disney brand becomes more popular in China, this should become an important revenue generator for the company.

Lately, Disney's capital expenditure has been on the decrease. In the last decade, the company invested very heavily into its theme parks, cruise ships and resorts across the world. Now the company expects to generate a lot of free cash flow from all these investments it made, and it hopes to return move value to shareholders in shape of dividends and repurchases.

In the last few years, the company's number of outstanding shares has been fluctuating rather wildly. In 2009, Disney had 1.82 billion outstanding shares, which rose to 1.90 billion in the next year, but the number fell to 1.76 billion in the following year. In 2012, Disney had 1.80 billion outstanding shares which is consistent with today's number. Even though the company keeps buying its shares back, it also keeps increasing its share count because of stock-based-payments to its employees. This year's buyback might be large enough to offset all of the stock-based-payments and add more value to the shareholders.

After earning $1.76 per share in 2009, $2.09 per share in 2010, $2.52 per share in 2011 and $3.13 per share last year, the company is expected to earn $3.38 per share this year, $3.90 next year and $4.55 in 2015. Disney keeps growing its earnings year after year and the future of the company looks very bright.

The last couple weeks, I published a few articles defending Disney. I also initiated an options play in addition to my existing shares with the company. When the shares fell to $60, I bought some call options expiring in 2015 with a strike price of $60. When the share price hit $65, I sold my calls back with a quick 40% profit. If the company's share price falls to low $60s again, I plan on repeating the same thing again. Sometimes, the upside with large companies seem very limited; however, you can always increase your upside potential (in return for increased risk) with some simple options plays.

In conclusion, Disney continues to be a solid investment for many investors and the company doesn't stay in the oversold territory for long. This is one of those companies both retail investors and institutions seem to love a lot.

Disclosure: I am long DIS. 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.

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