by Tom Taulli | January 6, 2014 2:55 pm
For the past year, just about every Dow stock had a nice run. But there were some that had standout performances — like Disney (DIS), which gained an impressive 55% in 2013.
Founded in 1923, Disney actually seems to be more like a young company. It has somehow been able to keep up with the fickleness of consumer tastes year after year, but it has also been smart enough to adopt new technologies to stay relevant.
But with the huge gain in DIS stock already, is there still an opportunity for shareholders? Or is it time to hold back? Here’s a look at DIS stock’s pros and cons:
Entertainment empire: Disney has a an amazing assortment of marquee businesses, all of which have synergies. The main ones include:
Content is king: While DIS has some of the world’s most creative talent, it has also been willing to pull off transformative acquisitions to greatly expand its high-quality content. And Disney has been adept at getting maximum value from these assets. Consider the case with Marvel — Disney was able to create two $1 billion blockbusters with The Avengers and Iron Man 3. But DIS has also able to use the content for television shows, such as Agents of S.H.I.E.L.D., as well as original programming coming soon to Netflix (NFLX). Expect to see a similar approach with the valuable Star Wars franchise that Disney got with the Lucasfilm acquisition.
Financials: Disney seems to run like a machine. In the fiscal fourth quarter, revenues increased by 7% to $11.6 billion, and earnings climbed by 12% to $1.39 billion, or 77 cents per share. The Street was looking for revenues of $11.4 billion and earnings of 76 cents per share. DIS stock showed strength across all the main segments of its operations. Even with the run-up in DIS stock price, the valuation is still reasonable, with a forward price-to-earnings ratio of 16.8.
Cyclical Business. When the economy goes sour, so does the business for Disney. Consumers can easily cut back on such discretionary expenditures. It’s true that the global economy currently looks stable, but the fact is that the environment can change quickly — and DIS stock would certainly feel the pain if that happens.
Hits business: To keep cranking out the growth, Disney needs to keep making blockbusters. While the company has an enviable track record, it has had some periods where it hit dry spells. The most notable was back in the 1970s, when things got so bad that Disney was the subject of a hostile takeover attempt. So yes, DIS could have another bad run — which could be problematic in light of the huge budgets for films (I’m looking at you, Lone Ranger) and other forms of entertainment.
Change in technology: Disney has tried to stay head of the latest channels. For example, the company recently brought the co-founder of Twitter (TWTR), Jack Dorsey, on to its board of directors. But technology may have a dark side. As seen with the music industry, there is always the threat of free sharing of content. And now that storage is dirt cheap, that threat extends to films. Another big issue is the decline in the usage of DVD purchases, which has historically been a reliable revenue stream.
Disney CEO Robert Iger has done a tremendous job with the company. He has made savvy acquisitions and has also continued to invest in the parks, media assets and consumer goods business. The result is that Disney has become a global media juggernaut.
Going forward, there should be some nice catalysts, such as from the treasure trove of content from Lucasfilm and Marvel. In today’s media-saturated world, it is tough to stand out. But Disney should have few problems with this.
So should you buy DIS stock? Yes, in light of the factors above, the pros outweigh the cons on the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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