In this article, let's take a look at The Walt Disney Company (DIS, Financial), a $150.37 billion market cap company, which is a media and entertainment conglomerate that has diversified global operations in theme parks, filmed entertainment, television broadcasting and consumer products.
Two businesses
The company has a portfolio of recognized brands, such as Walt Disney, ABC, Marvel Entertainment, Touchstone Pictures, Lucas films and the most successful media brand: ESPN.
Although we know Disney is a media conglomerate, it can be seen as two distinct but complementary businesses. The first, a media networks, which include ESPN and ABC, and a second business with the Disney-branded businesses, which include including parks, filmed entertainment, and consumer products.
ESPN, ESPN2
The star of the media networks segment is ESPN, which in the past was a small niche network with negative results until it paid for the NFL rights and then acquired rights to all the popular sports and attracted an audience. Charging the highest subscription fees on cable, it contributes about two-thirds of cable network sales. To say the true, I could not imagine that ESPN could lose its dominant position.
The Disney Channel also benefits from internally generated production with Disney's films and animated characters. Disney's library of content with popular franchises and characters generate a predictable income stream.
Expansion outside the U.S.
Disney plans to penetrate in emerging economies such as China and India. The Shanghai Disney Resort will be the new presence in China which is expected to open next year (or 2016) with a Magic Kingdom-style theme park, two hotels and a Downtown Disney shopping center.
Further, the expansion reached India, the firm acquired the remaining 50% stake in UTV Software Communications Ltd.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 7.66% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.28 vs $1.01). During the past fiscal year, it increased its bottom line by earning $3.38 versus $3.12 in the prior year. This year, the market expects an improvement in earnings ($4.28 versus $3.38).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| DIS | The Walt Disney | 13.51 |
| TWX | Time Warner Inc. | 12.34 |
| FOXA | Twenty-First Century Fox Inc | 41.75 |
| Â | Industry Median | 7.96 |
The company has a current ROE of 13.51% which is higher than the one exhibited by Time Warner Inc. (TWX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at those levels or more, Twenty-First Century Fox Inc. (FOXA, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of21.1x, trading at a discount compared to an average of 43.6x for the industry. To use another metric, its price-to-book ratio of 3.3x indicates a premium versus the industry average of 3.19x while the price-to-sales ratio of 3.2x is above the industry average of 2.23x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $36,683, which represents a 29.7% compound annual growth rate (CAGR).
Final Comment
As outlined in the article, Disney's top businesses, which include creativity and innovation constantly, top star ESPN and the international expansion; are the key drivers of the company. Additionally, the opening of Shanghai Resort should provide additional momentum.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Ken Heebner (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio), Tom Russo (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Tom Gayner (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
