One of my “forever hold” stocks is The Walt Disney Company (NYSE:DIS). The reasons are exemplified in Disney’s earnings report for the first quarter of 2015.
Earnings for DIS stock flowed mightily, like Elsa’s magic in Frozen.
Year-over-year revenues were up 9% to $13.4 billion. Segment operating income jumped 17% to $3.5 billion. Net income rose an amazing 19% to $2.2 billion. Translating all this to EPS, DIS stock leapt from $1.03 per share to $1.27 per share, a 23% increase.
And so, the cold wind of earnings season delivered a warm front, wiping out estimates of $1.07.
Readers know that I am all about cash flow, cash flow and more cash flow. With big numbers like Disney earnings delivered, there’s no surprise that operating cash flow exploded 53% to $1.8 billion, and free cash flow was up 55% to $857 million.
Double-digit growth after all these years? Yes! That’s because Disney is essentially a company that is perpetually reinventing itself, churning out new products practically every year. It is very successful in creating content and creating verticals from that content.
Let’s look at some of the segment results from Disney earnings.
Of course, we all know about DIS stock’s famous Parks and Resorts division, which includes Disney parks and cruise lines. Revenues were up 9% and operating income was up 20%. This makes perfect sense, as virtually every theme park company has seen increased attendance and admission fees, as well as spending on food and beverage. Only international resorts struggled a bit for Disney earnings, but higher guest spending and ticket prices helped offset the declines.
On the studio side, I believe DIS stock is going to benefit for at least a generation due to the prescient acquisitions of Pixar, Marvel and LucasFilm. All three studios have a long history of producing outstanding great movies.
Name one bad Pixar film. You can’t.
Marvel consistently delivers on a three-star or four-star film basis, and the fanboys and families alike feed the box office. As for Lucasfilm, well, the Force will be back with Disney later this year. It already is in animated form for Disney Channel.
The result for Disney earnings was a 2% decrease in revenue, but operating income rose 33% to $544 million.
Amidst all the cash flow, it’s easy to forget that even though DIS stock carries $12 billion in debt, the total interest for the quarter is only $69 million. It’s offset by a very handsome cash pile of nearly $5.1 billion. It is exactly this cash flow that permits DIS stock to plow all that money right back into making new content and maintaining their parks and resorts.
With 2015 estimates now expected to come in at $4.91 per share, up 14% from $4.32 per share, and not even including an expectation for more estimates being beaten, Disney trades at 19x FY15 earnings.
I give DIS stock a 10% premium each for great cash flow, lots of cash on hand, and world-class brand name.
At worst, then, it’s trading at fair value, so you should expect 14-16% appreciation plus 1.3% yield going forward. That’s unquestionably a buy.
As of the writing, Lawrence Meyers owned shares of DIS.
