Grow Old And Become Wealthy With Disney

| About: The Walt (DIS)

Summary

Star Wars' success reaffirms Disney's ability to monetize consumers' childhood for many generations to come.

Media segment risks will be offset by the increased appetite for quality entertainment in emerging countries.

ESPN still is the highest-quality sports content distributor.

Growing economies around the globe mean larger appetites for entertainment in the long run.

The Star Wars Tailwind

Star Wars' enduring appeal is now official. Mirroring Frozen's success from 2013, all Disney (NYSE:DIS) business segments should benefit from the Star Wars effect. The catalysts are as below:

  • Media: Higher Disney XD channel subscription due to Star Wars animated series, which fills story gaps between cinematic releases.
  • Parks: Shanghai Park opening in 2016, Disneyland Star Wars-themed zones, Disneyworld Hollywood Studio's Star Wars attractions. I was in Disneyworld last year, and the crowd was wild.Hollywood Studios Star Wars Weekend
  • Studio: The number 1 film of all time, with further installments planned up to Star Wars Episode 9.
  • Consumer and Interactive: Licensing revenue will benefit from additional young female demand on Rey's (Star Wars' female lead) merchandise. Check out the "#WheresRey" hashtag. Light sabers, anyone? Star Wars-related games, such as Battlefront, released in 2015, and Infinity game packs will also gain traction when the movie characters and story line are made available in video games.

The bigger conclusion to draw from Star Wars' success is Disney's continued show of strength in accumulating high-quality intellectual properties and creating experiences so many people desire. For example, the franchise had been relatively dormant for an extended period of time since the prequel trilogy release, until recently. Under Disney's banner, we are seeing signs of Lucasfilm's potential being unleashed and unmet consumer demands being addressed.

Future Prospects

Disney has an incredible "moat". 40 years from now, you will most probably find many consumers who are still emotionally attached to Spiderman (Marvel) or Star Wars. Disney's intellectual assets are gifts that keep on giving, where consumers would gladly pass on their past experiences with the younger generations. In the long run, Disney is unlikely to be disrupted. It is also a main beneficiary of technological advancements in networking (content distribution), robotics (park attractions) and computing (content making).

Disney does not only rely on cinematic blockbusters to gain growth, as I believe the company represents a great proxy to emerging market growth when the global economy stabilizes. In the next 10-15 years, Disney Parks may overtake Media as the main revenue contributor, and Disney is in a sweet spot to benefit from the rise of affluent holiday-goers among the Asian middle class. The international outbound tourist traffic generated by Asia-Pacific countries over the past 10 years has grown at an annual rate of 6.1%, and is set to continue.

In the long run, the company's global reach will allow it to materially increase its revenue from Asia-Pacific and Latin America, aided by the rising disposable income levels in these emerging markets. In the near term, Disney will benefit from a strengthening US economy, where it derives approximately 75% of its revenue, based on 2014 estimates.

Cable Risk

Loss of subscribers in ESPN is a source of risk, primarily due to cord cutters who prefer to consolidate content viewing via the internet only. Disney relies on a strong TV environment to generate high-margin advertising income, which explains investors' concern on the declining appeal of ESPN.

The market for live sports viewing is still growing from strength to strength. In my opinion, as long as Disney retains exclusive distribution rights to quality live sports franchises, it can ride out any temporary headwinds. If cord cutting becomes a structural shift, Disney can opt to improve cable package competitiveness or ramp up direct internet offerings. ESPN's importance to Disney is declining, and any near-term risks will be offset by anticipated growth in Disney kids content channel subscription due to a spike in Star Wars content demand.

Financials

Disney should be able to expand its net profit margin again in the coming year - as it did in 7 out of the past 10 years.

  • Liquidity: Disney's debt-to-asset ratio has been relatively steady, but increasing within the range of 0.40-0.45 over the past 3 years. This is due to additional capital expenditure in international park construction ($2.15 billion in 2015). Disney's financial health is sound considering its A2 Moody's debt rating, evenly dispersed debt structure over the coming years and large operating cash flow ($10.9 billion in 2015).
  • Efficiency: The company has consistently improved its net profit margin in 7 out of the past 10 years. Reduced margin over the next few quarters due to higher fixed costs in cable networks remains a possibility. However, the scale benefits from increased international demand will eventually overcome this risk, evident from consistent 9-10% media revenue increase over the past 4 quarters.

Net Profit Margin (10 Year)

  • Valuation and Growth: Disney is trading at its early 2015 PBV range of 3.6 before the Star Wars hype, trailing 2015 PER of 20.5 and 15 times operation cash flow at its current ~$100 per share mark. I believe that the EPS growth will outpace the trailing PER, with Disney continuing to beat consensus estimates. In 2013-2014, the EPS grew by 26% due to Frozen's success. It is not unreasonable to expect a similar improvement in the coming year, especially with the confirmed success of The Force Awakens, Captain America's expected release and the Shanghai Park opening.

In short, Disney has already been de-risked due to the confirmation of Star Wars' success and the recent market-wide sell off. Just like every other stock nowadays, it is subject to further near-term volatility, and the advice here is to accumulate slowly and retain a sizeable cash holding to pounce if the pullback continues. Disney deserves a premium, and the current valuation represents a compelling buying opportunity for the long haul.

Disclosure: I am/we are 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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