When it comes to investing in entertainment, I suggest The Walt Disney Company (NYSE:DIS) over anything else. That’s because in the entertainment industry, investing in straight-up movie productions is a terrible mistake. Success is random based on consumer tastes, and is risky because it requires an enormous amount of capital.
However, Disney and DIS stock have performed exceptionally well over the long term. That’s because it has never been a homogeneous operation. It has cobbled together many different businesses over a very long time, and turned them all into long-term growth vehicles.
DIS stock remains a compelling buy for a long-term portfolio because it has diversified so effectively.
Of course, the center of DIS stock and its revenue is the studio division. Beyond legacy Disney princess brands, DIS stock will benefit from next-generation brand names going forward: Pixar, Marvel and LucasFilm. The three were purchased for several billion dollars each, but as I knew they would all along, they’ve all generated so much more than the purchase prices.
Think about how the first generation of DIS stock was about Walt Disney and his animated movies, and the merchandising and theme parks that came from it. The new generation has expanded well beyond that. Theme parks have gone global and spawned a cruise line. Marvel Studios has continued to grow and expand into a multipronged universe of movies and TV shows. LucasFilm has now been successfully reborn, not only with a Star Wars reboot, but with the forthcoming Rogue One film.
The box office next year is going to be massive, with more Marvel films on the way. Also, Rogue One will see most of its revenue in the first part of the year, a Cars 3 film is coming, and there’s another Pirates of the Caribbean movie.
On top of all these movies come the television and merchandising tie-ins. Marvel has several TV shows on ABC and Netflix Inc. (NASDAQ:NFLX). Star Wars has several ancillary properties, as well. Any movie that is produced means plenty of stuffed animals and toys of all shapes and varieties.
Even though the ESPN division is transitioning, Walt Disney has rarely dropped the ball when faced with challenges. Bob Iger isn’t going anywhere, so investors should have faith.
The ESPN situation is going to be fixed. Walt Disney purchased a 33% stake in BAMTech, which it can leverage into a direct-to-consumer streaming platform. Anything can happen with technology, from subscriptions to a la carte on all kinds of programming, not just sports.
Theme parks just continue to roll along, too.
Disney just raised prices at U.S. parks with little resistance. The Shanghai park opened in June, with more than 4 million visitors already. This segment alone delivered a 9% increase in FY2016 earnings and about 25% of total operating income growth.
DIS stock has increased four-fold since Iger took over in 2005. Media Networks division revenue has increased from $13 billion to almost $24 billion, and operating profit almost tripled from $2.7 billion to $7.7 billion. Studio Entertainment, as a result of the aforementioned purchases, soared from $200 million in operating profit to $2.7 billion. Parks and Resorts revenues have nearly doubled, leading to an operating income increase from $1.2 billion to $3.3 billion.
When we add in the Consumer Products results, revenues nearly doubled from $32 billion to $55.6 billion and operating profit soared from $4.6 billion to $15.7 billion.
Today, Disney’s market cap is $157 billion. Net income over the last year was $9.25 billion, putting DIS stock at a P/E of about 17 times earnings. With five-year estimates showing growth of 10% per year, a 1.45% for the dividend and a 10% premium that I award companies with a world class brand-name and another 10% for cash flow, DIS stock seems just slightly overvalued.
Still, for those seeking a winning stock for a long-term diversified portfolio, you can’t do better than Disney. I would still buy here.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.