Disney (DIS) is one of America’s leading entertainment and media companies. From Walt Disney’s founding of the company 92 years ago, it has grown into one of the most powerful institutions in the country. Every day, its movies, TV channels, cruises, and amusement parks thrill tens of millions of people.
DIS stock has been thrilling recently, but more in the roller coaster sense of the term. The stock has made two runs at $120 over the past year before getting strongly turned back. The buzz around the successful Star Wars movie was expected to carry DIS stock to new all-time highs. Instead, it slumped back into the $90s.
But since February, DIS stock is newly on the rise. Can it keep going this time, delighting its shareholders once again?
DIS Stock: Pros
Disney Shanghai: For those looking for an immediate catalyst to DIS stock, the opening of Disney Shanghai is a good bet. The Disney property there will be the company’s first in mainland China (they also have one in Hong Kong). The resort will be massive, covering almost 1,000 acres. It also promises to be glamorous, at least if the more than $5 billion construction budget is indicative.
The park is scheduled to open in June, and will hopefully revive the company’s flagging Chinese presence. The Hong Kong park has struggled in recent quarters, due to currency fluctuations and a weakening Chinese consumer. However, the opening of a mainland park will make Disney much more accessible to the average Chinese person and offer additional opportunities to cross-market other Disney brands and merchandise.
Excellent Movie Acquisitions: In 2006, Disney acquired the Pixar movie studio for more than $7 billion. It seemed expensive at the time. But oh, what a deal it was. So far, Pixar, with its continuing streak of box office smashes, has generated international movie gross ticket sales of more than $4 billion. And that’s just one part of Disney’s monetization strategy, since they can sell merch, integrate with the amusement parks, and also benefit from the valuable characters and intellectual property for decades to come.
In addition to the Pixar deal, Disney also picked up Lucasfilm for $4 billion. Given that last year’s Star Wars did $1.9 billion in gross ticket sales last year, it’s fair to say that deal will pay for itself sooner than later. Disney is not only very good at making movies, they also are shrewd buyers of other people’s creative property.
Fantastic Track Record: DIS stock has risen 270% over the past 10 years. The company has grown revenue from $33 billion to $54 billion annually over that stretch. That’d be impressive in and of itself. However the company has managed to sharply increase its profit margins, sending earnings per share up from $2.25 to $5.36. The company has also almost doubled EBITDA over that stretch.
Shareholders have been rewarded for this dramatic growth. Disney is an aggressive purchaser of DIS stock with its buyback program. Additionally, the company has — this is no typo — more than quadrupled the dividend over the past 10 years. In 2006, they paid 31 cents per share, now it is $1.42 per share annually. That’s tremendous growth.
DIS Stock: Cons
ESPN Problems?: It’s easy to think of Disney as a diversified business. They have amusement parks, toys, movies, cruises, and so on. However, despite being an amalgamation of many adjacent businesses, Disney has one cash cow that runs the show: ESPN.
ESPN is, of course, the nation’s dominant sports channel. It commands a premium rate, more than $6 per subscriber per month just for the flagship channel from cable companies for carrying it. Multiplied across tens of millions of living rooms, that’s serious money. Disney’s cable channels earn an outlandish 43% profit margin, while their over air broadcast channels earn just a third of that. Assuming that the skinny TV and cord-cutting trends continue, ESPN margins will likely take a big hit. ESPN isn’t going anywhere, sports beg to be seen in real-time high quality video, but ESPN’s revenues are likely to drop significantly.
The Dividend Increases Will Slow: One of the appeals of DIS stock is that the dividend has been rising at a rapid clip. The dividend has been increased at an 18.4% rate annually over the past 10 years and a mouth-watering 35.9% annually over the past five years. If that torrid rate could continue in the future, buyers of DIS stock today would receive huge dividend checks in the future.
But the growth rate will slow dramatically. Disney hasn’t grown its earnings base that quickly. Over the past five years, while the dividend was rising at 36% a year, revenues were rising at just 9% a year, and free cash flow at 16% a year. Those are still very solid numbers, but they don’t support the massive dividend increases. Those have come from diverting more of the company’s earnings from reinvesting in the business and instead toward shareholders. You can only raise your payout ratio so far though; at some point, Disney’s dividend growth rate will return to earth.
Expensive: DIS stock’s 19.4 P/E ratio may not appear immediately expensive. However, compared to its past track record, it’s right at the top end of the range. Disney shares, since 2003, have never ended a year with a P/E ratio above 21. Unless the market takes Disney’s multiple to unusually high levels, the stock doesn’t have a lot of upside if the earnings growth rate slows.
And on other metrics, the stock looks decidedly expensive. The company’s price-to-sales ratio is up to a heady 3.3. In 15 years of historical data, there’s not been any readings higher than the present one on that metric for Disney. The company’s price-to-cash-flow metric has also doubled since 2010, meaning that a DIS stock holder sees his shares only produce half as much tangible cash annually as they did in 2010. That’s great if you owned the stock the whole way up, but not so good for new buyers.
DIS Stock: Verdict
DIS stock is expensive now. But, really, what isn’t? The market as a whole is generally overpriced. If you’re going to pay a rich price for a stock, you may as well buy a high quality franchise with outstanding brands and excellent management. I can’t in good faith endorse a Disney purchase with shares quite this high. But if you like the company and are confident in its long-term prospects, you probably won’t fare too badly buying, even at the current lofty price.
At the time of this writing, Ian Bezek had no position in DIS stock. You can reach him on Twitter at @irbezek.
