It has been a long time since Walt Disney Co (DIS) stock traded 20% from its 52-week high, but that’s where the stock finds itself at now.
The latest news to push Disney stock lower is the sudden and unexpected resignation of COO Thomas Staggs, who was largely considered the successor to Bob Iger when he steps down as CEO next year.
While this may look like bad news for DIS, fact is that Disney deserves the benefit of the doubt and has continuously proven that it does not make mistakes.
Staggs Is No Iger
Personally, I am not sure why Staggs was always considered the clear-cut favorite to replace Iger when he retires. Yes, Staggs has done a good job overseeing the parks, getting Disney Shanghai ready to open and implementing significant changes to better the company, like Disney’s MagicBands. However, he has been a good supervisor, with his background in finance and most of his tenure spent in strategic planning and executive finance roles.
This leads to the question of whether Staggs would have the creative talent and vision to head a major media and entertainment company like Disney. Yes, he could probably find ways to squeeze margins higher, but Disney operates in industries that require constant innovation and transformation, staying two steps ahead of the competition.
That’s what made Iger so great — a man who started his career as a weatherman before rising up the ranks of ABC as an executive, through mostly advertising and marketing roles (i.e. creative).
In retrospect, the board was likely wise to realize that Staggs might not have the creative vision to completely revamp and redirect the company’s media segment, like Iger did with acquisitions of Pixar, Marvel and Lucasfilm — all of which are crucial to the future of DIS and a big part of the legacy that Iger will leave behind.
DIS Clicking on All Cylinders
With that said, the biggest risk facing Disney stock and company right now, if there is one, is the inevitable retirement of Bob Iger next year. However, Iger will leave the company in great position for the next decade and investors should have no doubt that the board will make the right decision when it comes to who gets hired.
Furthermore, the declines in ESPN subscribers that have weighed so heavily on Disney stock have started to bottom, and are very likely growing once more.
Despite declines in ESPN last year, revenue still grew more than 7% and is expected to grow more than 7% this year. That growth is because Disney’s media, consumer products, studio and parks businesses are on a seemingly unstoppable run.
4 Phases for Disney Stock Long-Term Growth
While Disney’s parks business always performs well, and will perform better in the future due to the opening of Disney Shanghai, it is the studio, media and consumer products businesses that provide the real catalysts.
Disney’s animated business is breaking records with the launches of what will likely become a series of blockbuster movie franchises with Frozen and Zootopia. Then, Marvel and Lucasfilm are certain to create at least another half-dozen billion-dollar movies over the next five years.
While great for Disney, that’s just phase one. Afterwards, the company moves into phase two, where its consumer products business thrives behind toy and clothing sales associated with those blockbuster movie titles.
Finally, phase three involves licensing that successful video content to the highest bidders, which in the world of high-priced content wars means that Disney’s earnings for successful Pixar, Lucasfilm and Marvel titles can continue for years to come.
And finally, phase four involves bringing those characters and movies to life at one of Disney’s theme parks. Historically, the attraction of Disney theme parks has been the characters it creates on film, which started with Mickey and goes all the way to Frozen and Star Wars attractions.
When you put it all together, and consider that this is a company that can maintain a 6% to 7% growth rate for at least five years, then it is easy to conclude that Disney stock at just 18x FY2015 EPS is way too cheap.
This is a company that deserves to be trading at a premium, yet is trading at a cheaper stock multiple than the likes of Twenty-First Century Fox Inc (FOXA) and MGM Resorts International (MGM), both of which are growing slower than Disney.
The bottom line: Buy Disney stock and forget about it. The future for DIS is bright.
As of this writing, Brian Nichols owned shares of DIS stock.
