- Walt Disney offers its shareholders a diverse stream of revenue and operating income.
- Walt Disney has expanded its top and bottom line at a healthy clip over the past five years.
- Walt Disney sits on a good balance sheet.
Entertainment conglomerate Walt Disney (NYSE:DIS) has a great deal to offer to its long-term investors. The company sports several iconic brands and possesses multiple ways to utilize its properties. Creativity rules in this age of digital disruption, and Walt Disney represents a prime example of a company that can thrive. Right now concerns in the financial media over cord cutting have created doubts in the minds of investors. However, long-term investors in Walt Disney’s stock should remain steadfast. Here’s why.
Diverse Revenue Streams
Walt Disney possesses a diverse revenue and profit stream under its general core competency of providing entertainment experiences. Basically, Walt Disney can leverage its brand via the following segments: media networks, parks and resorts, studio entertainment, consumer products and interactive media. This enables the company to make up for declines in some aspects of its business with growth in another.
The financial press has been down on the company lately over cord cutting headwinds on media networks, most notably ESPN. Their concerns aren’t entirely unjustified (see table below). Media network’s percentage of Walt Disney’s overall revenue trended downward over the past five years. Moreover, the media network’s percentage of total operating income declined steadily during that time. However, other segments have made up for the shortfall. Notably, the studio segment, which has been the fastest growing segment so far in FY 2016 with operating income expanding a whopping 60% YoY.
Source: Sec filings and author's calculations
Studio operating income could conceivably overtake media networks as the primary generator of operating income. The studio segment itself is diverse with four huge brands under its roof, including Walt Disney Studios, Pixar, Marvel and Lucasfilm, making this feat possible. For example, a Pixar movie can be moving through the box office while a Lucasfilm movie is under development. Of course, all of the content generated from the studios and media networks can be put in comic, novel and video game formats. Also, toys based on Disney content can be developed and saved.
Culture of perfection
One of the things I like about Walt Disney is that they want to get it right, especially when it comes to its studio brands. The recent rumored reshoots of Star Wars: Rogue One serves as an indication. Walt Disney executives understand all it takes is one box office flop to put a crimp in the brand. Walt Disney wants its stories and accompanying special effects to resonate with audiences.
Over the past five years, Walt Disney expanded its revenue, net income and free cash flow 7%, 16% and 8%, compounded annually. This level of growth translated into stock price expansion of 159% for Walt Disney versus 64% for the S&P 500, as of this writing (see chart below).
Despite media pessimism, Walt Disney’s fundamentals are excellent. Its year-to-date revenue, net income and free cash flow expanded 9%, 17% and 12%, respectively, YoY. The company’s balance sheet resides in good shape. In the most recent quarter, Walt Disney’s long-term debt only amounted to 32% of stockholder’s equity. Year-to-date operating income exceeded interest expense by 89 times. The rule of thumb for safety lies at five times or more.
Walt Disney pays a good dividend. The company currently pays shareholders $1.42 per share per year yielding 1.4%. The company only paid out 36% of year-to-date free cash flow, which is low.
Walt Disney currently trades at a P/E ratio of 18, due in part to ESPN cord cutting fears, which compares favorably to the S&P 500’s P/E ratio of 24. A rock solid company like Walt Disney doesn’t often come at such a cheap price. Walt Disney will most likely continue its pipeline of sci-fi, fantasy blockbusters. Its studio and theme park segments have the potential to make up for any declines incurred by cord cutting. Good original content has the ability to be distributed across any medium. Walt Disney stock definitely deserves a long-term spot in your portfolio.