Disney: An Attractive Long-Term Stock

| About: The Walt (DIS)
This article is now exclusive for PRO subscribers.


Disney outperformed the S&P 500 and its competitors in the last twelve months.

Disney reported another blockbuster quarter with impressive growth from the film studio.

Disney is a long-term buy because its business model holds the potential to deliver good growth numbers in the long term.

The Walt Disney Company (NYSE:DIS) is a diversified multinational mass media company that is a gem for its delights. Disney continues to releases impressive earnings results. Disney is flying high in terms of profitability and its stock is trading at the highest price in the company's history. The stock was able to hit $86.75 when the company released tremendous quarterly results and in response investors were happy to increase their investment in this stock. In the last twelve months Disney outperformed the S&P 500 index and its competitors. Its total return to investors in the last year increased 31.74% while the S&P 500 only increased 14.68%. Two of its rivals Viacom (NYSE:VIA) and Time Warner (NYSE:TWX) increased 4.31% and 25.20%, respectively. So, why not invest in a company that holds the potential to deliver more impressive returns to its investors?

Source: Ycharts

Numbers Also Entertains

Every one of Disney's business segments delivered more or less convincing growth numbers. The top-line growth helped to increase Disney's bottom-line growth. This is important from an investors point of view because the higher the per share earnings growth the more investors get in return and this is what Disney delivers. Recently Disney released its third quarter results for fiscal year 2014. These numbers were well ahead of analysts' estimates. The quarterly profits totaled $2.25 billion for the latest quarter and this translates into 22% growth from the third quarter of 2013. The tremendous profit growth is largely due to the success of its Marvel franchise.

These profits translated into $1.28 per share earnings for the quarter well ahead of the $1.17 per share that analysts had expected. Revenues totaled $12.47 billion for the quarter reflecting an increase of 8% from the figure reported in the same quarter of 2013. Per share earnings grew 27% from $1.01 in the third quarter of 2013. On a comparable basis, adjusting certain items, per share earnings increased 24% from $1.03. The profitability improved due to the company's strategy to build strong brands and franchises which continues to create value across all of its business segments.

Where Disney Lacks

Unlike other segments, cable network could not deliver growing numbers in the third quarter but operating income dropped 7% to $1.9 billion. The poor performance of this segment is mainly due to headwinds at ESPN. The higher programming and production costs restricted the profitability of this business. Hit by a combination of higher costs for Major League Baseball and the 2014 FIFA World Cup as well as a shrinking subscriber base for ESPN and certain timing issues were amongst other reasons that limited the revenues growth to 1% only reaching $3.9 billion.

Cable network may overcome this poor performance in the coming quarters and the company should focus on controlling its programing costs. This business possesses growth potential because consumers are increasingly willing to pay for entertainment that suits their interests. Over the next five years, cable distributors will demand more programming and new digital and high-definition (NYSE:HD) channels from networks. Revenues from cable and satellite companies who pay Disney to carry ESPN grew in the mid-single digits last quarter. Such fees are key growth drivers of ESPN's business and it should return to a high single-digit growth rate in the current quarter and continue at that pace through 2016 due to higher demand and improved rates.

Another Blockbuster Quarter

Marvel has become an important growth driver and Marvel Entertainment has delivered impressive results after Disney acquired it back in 2009. Disney's film studio enjoyed another blockbuster quarter with the operating income more than doubling from the figure reported in third quarter of 2013. The top line delivered 14% growth, revenues reached $1.8 billion, and the operating income reached $411 million.

The hit animated movie Frozen continues to add profits because of home-entertainment sales of Frozen as well as the animated musical's ongoing success at the overseas box offices particularly in Japan. Captain America: The Winter Solider, which has made $713.6 million worldwide since its debut in April, and Maleficent bolstered the Walt Disney Studio's sales. Rerun sales of Marvel's Agents of S.H.I.E.L.D. helped lift Disney's operating income at the broadcast division by 66%.

In the current quarter, Disney's film studio business will increase the company's growth and will add a pretty impressive earnings stream with the success of its recently released Guardians of the Galaxy. Guardians of the Galaxy earned $94 million in its opening weekend making it the third biggest opening of the year behind Captain America which has already lifted third quarter results. It also earned $66.4 million in the initial overseas release totaling $160.4 million worldwide since debuting overseas on Thursday. With this recent success the Disney film studio is likely set another milestone when the company releases its fourth quarter results for 2014.


Disney is very profitable in almost all of its businesses, particularly in the film studio and theme parks and resorts segments. Disney will continue to grow because of its strong business model. There are many blockbuster movies in Marvel's pipeline which include Avengers: Age of Ultron, Captain America 3, Ant-Man and Doctor Strange in the next two years. On the other hand, the opening of the Shanghai theme park will also increase the company's top and bottom lines in the long term.

Disney is an attractive long-term stock because the company has the potential to grow in all its segments. The stock is currently trading at a forward price to earnings multiple of 18.74 times and it is not expensive because of its expected average earnings growth rate of 16.15% for the next five years. The average price for this stock is $90.27 which seems quite conservative when looking at the financial performance of the last year. If taken high target price of $100 then Disney may give rise to an upside potential of around 15% on its current price.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.