On Sept. 30, top hedge fund managers added The Walt Disney Company (DIS, Financial) to their portfolios. The company, with its subsidiaries and affiliates, is a leading diversified international family entertainment and media enterprise and operates through five segments:
- Media Networks (46% of 2013 revenues), which operates the ESPN, Disney Channels Worldwide, ABC Family, SOAPnet and UTV/Bindass cable television and radio networks.
- Parks and Resorts (31%), which operates the Walt Disney World and other Disneyland resorts.
- Studio Entertainment (13%), which produces and acquires live-action and animated motion pictures for distribution to theatrical, home entertainment, and television markets.
- Consumer Products (8%), which licenses trade names, characters and visual and literary properties to retailers, show promoters, and publishers.
- Interactive (2%), which produces and distributes console, online and mobile games.
$6 Billion of Annual Affiliate Fee Revenues
The company has a portfolio of recognized brands, such as Walt Disney, ABC, Marvel Entertainment, Touchstone Pictures, Lucasfilms and one the of the most successful media brands, ESPN. Four decades ago ESPN 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 attracting audience. ESPN charges the highest subscription fees on cable and contributes about 75% of cable network sales. It is difficult to think that ESPN could lose its dominant position due to expensive contracts signed with various sports leagues.
The $4.4 Billion Shanghai Disney Resort
The company focuses in emerging economies such as China and India. The Shanghai Disney Resort will be the new presence in China which is expected to open in 2015 with a Magic Kingdom-style theme park, two hotels and a Downtown Disney shopping center. Also, the international expansion reached India, the firm acquired the remaining 50% stake in UTV Software Communications Ltd.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.8x, trading at a premium compared to an average of 19.8x for the industry. Analysts’ expectations imply a forward P/E of 15.6. To use another metric, its price-to-book ratio of 2.76x indicates a premium versus the industry average of 2.34x and the price-to-sales ratio of 2.82x is above the industry average of 1.84x. Earnings per share (EPS) rose by 13% in the most recent quarter compared to the same quarter a year ago ($0.77 vs. $0.68). Also, it has demonstrated a positive trend in EPS growth over the past two years as shown in the next graph. We include the stock price because growing EPS often leads to appreciation in share price.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The company has a ROE of 14.73%, doubling the industry average. This valuation might attract investors.
Final Comment
The Walt Disney holds the best market positioning and for all that we have seen in the article, I would advise fundamental investors to consider adding the stock to their portfolios, as it seems to be an attractive option for the longer term. Hedge fund gurus like Jim Simons, Louis Moore Bacon, Ray Dalio, Andreas Halvorsen, Steven Cohen and Mario Gabelli have already thought about it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
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- Media Networks (46% of 2013 revenues), which operates the ESPN, Disney Channels Worldwide, ABC Family, SOAPnet and UTV/Bindass cable television and radio networks.
- Parks and Resorts (31%), which operates the Walt Disney World and other Disneyland resorts.
- Studio Entertainment (13%), which produces and acquires live-action and animated motion pictures for distribution to theatrical, home entertainment, and television markets.
- Consumer Products (8%), which licenses trade names, characters and visual and literary properties to retailers, show promoters, and publishers.
- Interactive (2%), which produces and distributes console, online and mobile games.
$6 Billion of Annual Affiliate Fee Revenues
The company has a portfolio of recognized brands, such as Walt Disney, ABC, Marvel Entertainment, Touchstone Pictures, Lucasfilms and one the of the most successful media brands, ESPN. Four decades ago ESPN 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 attracting audience. ESPN charges the highest subscription fees on cable and contributes about 75% of cable network sales. It is difficult to think that ESPN could lose its dominant position due to expensive contracts signed with various sports leagues.
The $4.4 Billion Shanghai Disney Resort
The company focuses in emerging economies such as China and India. The Shanghai Disney Resort will be the new presence in China which is expected to open in 2015 with a Magic Kingdom-style theme park, two hotels and a Downtown Disney shopping center. Also, the international expansion reached India, the firm acquired the remaining 50% stake in UTV Software Communications Ltd.
Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.8x, trading at a premium compared to an average of 19.8x for the industry. Analysts’ expectations imply a forward P/E of 15.6. To use another metric, its price-to-book ratio of 2.76x indicates a premium versus the industry average of 2.34x and the price-to-sales ratio of 2.82x is above the industry average of 1.84x. Earnings per share (EPS) rose by 13% in the most recent quarter compared to the same quarter a year ago ($0.77 vs. $0.68). Also, it has demonstrated a positive trend in EPS growth over the past two years as shown in the next graph. We include the stock price because growing EPS often leads to appreciation in share price.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The company has a ROE of 14.73%, doubling the industry average. This valuation might attract investors.
Final Comment
The Walt Disney holds the best market positioning and for all that we have seen in the article, I would advise fundamental investors to consider adding the stock to their portfolios, as it seems to be an attractive option for the longer term. Hedge fund gurus like Jim Simons, Louis Moore Bacon, Ray Dalio, Andreas Halvorsen, Steven Cohen and Mario Gabelli have already thought about it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
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