The Walt Disney Company (DIS, Financial) reported record results for the 2015 fiscal year. The strong earnings report released on Nov. 5 helped the company's stock price to edge higher in the following day's trading, opening up 1.4%.Â
With an exceptionally high P/E, the company's stock value is very dependent on its ability to steadily generate revenue. Currently reporting a forward P/E of 18.17, it requires substantial revenue and EPS growth to justify its high trading price.
The fourth quarter's results delivered revenue and earnings more closely in line with what the market expects of the media conglomerate. Revenue for the fourth quarter was $13.51 billion, up 9% from the year-ago quarter and just slightly below analysts' average estimate of $13.55. Adjusted EPS totaled $1.20, beating analysts' estimate by 6 cents and increasing 35% from the comparable quarter.
For the year, Disney reported record revenue, net income and adjusted EPS, as nearly all categories gained with Studio Entertainment and Consumer Products creating substantial momentum for the firm, while earnings from Media Networks returned to more normal levels. Revenue for the year was $52.5 billion, with net income of $8.4 billion and EPS of $5.15.
"In fiscal 2015 we delivered the highest revenue, net income and adjusted EPS in the company's history, reflecting the power of our great brands and franchises, the quality of our creative content, and our relentless innovation to maximize value from emerging technologies," said Robert Iger, Walt Disney Company's Chairman and Chief Executive Officer.
In the fourth quarter, Media Networks reported a much stronger contribution to the firm's earnings results after faltering in the third quarter following subscriber losses from ESPN. Media Networks' revenue was up 12% from the comparable quarter at $5.8 billion. For the year, it also reported a substantial gain, up 10% at $23.3 billion.
Anticipated excitement over the release of "Star Wars: The Force Awakens" on Dec. 18 has also begun to take hold. Studio Entertainment in the fourth quarter posted an impressive operating income and margin increase, as film cost impairments descended for the quarter. Operating income in Studio Entertainment was up 109% from the comparable quarter with operating margin increasing 15%. Full year results were also strong, with operating income up 27% and operating margin increasing 5%.
The Star Wars release is expected to contribute to total revenue growth for the 2016 fiscal year of 10%. In addition to the release of "The Force Awakens", the firm also has annual releases of Star Wars films planned through 2019, which should help Studio Entertainment see continued annual operating income growth of 27%.
Consumer Products sales are also poised to grow significantly for Disney in combination with the release of "The Force Awakens." Beginning to recognize product sales with the release of the film in December, Consumer Products should see revenue growth of approximately 20% in the first quarter with operating income growth of 15%. As continued annual Star Wars releases follow through 2019, Consumer Products is also set up to maintain substantially higher annual growth rates in the near term.
The firm's underlying value versus its peers also provides further evidence for investors of the value opportunity. In the fourth quarter, Disney generated free cash flow of $2.1 billion, an increase of 4% from the comparable quarter. For the year, the firm generated free cash flow of $6.6 billion, up 3% from the previous year. As a significant free cash flow generator, the firm leads its media and entertainment peers with a five-year free cash flow to revenue percentage of 11.61%, versus 10.54% for CBS (CBS) and 9.16% for Twenty-First Century Fox (FOXA).
In addition to the firm's potential for revenue growth, its operating margin efficiency also outperforms its peers. Analysts are projecting revenue growth of 10% for Disney in 2016 versus revenue growth of 1% for CBS and loss of 3.5% for Fox. With continued revenue growth, the firm's superior operating efficiency is also expected to continue. For the trailing 12 months, Disney reported an operating margin of 24.02% versus 21.39% for Fox and 20.12% for CBS.
In recent trading, the stock has begun to recover value from its overextended losses.
As superior revenue generation and peer outperformance continue for Disney, further upside is likely in the current market environment. Currently, Disney is showing upside potential of nearly 30% with a discounted cash flow value of $160.60. At $115.50, now is an opportune time for investors to buy or increase their shares in the media conglomerate.
Disclosure: I have no positions in any stocks mentioned in this article.
