- Walt Disney’s focus on providing a superior experience helps drive its success.
- Walt Disney understands that content rules in the entertainment business.
- Walt Disney’s strategies translated into solid fundamentals and, subsequently, superior stock price returns.
Walt Disney (NYSE:DIS) stock represents the bluest of blue chips. Disney's deliberate focus on consumers, geographic expansion, content quality, and technology shows that management continues to work on making the company viable now and in the future. Let’s take a closer look at how Walt Disney’s focus will maximize shareholder value over the long-term.
Walt Disney understands that the No. 1 stakeholder of any organization is the customer. Ultimately the customer pays the bills of any company. The December edition of Wired Magazine talked about a perfectionist culture. Disney’s Pixar division pushed back the release date of The Good Dinosaur a full year and a half in order to perfect its story and boost audience appeal. Unfortunately, the movie clocked in $244 million, so far, in box office receipts barely exceeding its estimated budget of $200 million.
Walt Disney is also paying attention to its international consumers by building the new Shanghai Disney Resort with the Chinese in mind. In the company’s Q4 FY 2015 earnings call, Walt Disney’s management said, “we committed ourselves to making this resort authentically Disney and distinctly Chinese.”
In a more popular and current example, Star Wars: The Force Awakens satisfies the Sci-Fi audience with plenty of action supported by enough dialogue to give the audience a small but solid background into the saga. As of this writing, Star Wars: The Force Awakens has grossed more than $1.5 billion, and counting, according to Box Office Mojo.
Walt Disney understands that it’s a content company. Management feels that if content is superior then the final consumer will be delighted. As a result, it operates under the assumption that distributors, present and future, can’t do without its branded products. Consumers come to the theaters, company theme parks, and cruise lines with the expectation of being wowed by Walt Disney, Marvel, Lucasfilm and Pixar characters. That’s why Pixar management was willing to scrap an earlier version of The Good Dinosaur and start over from scratch.
Walt Disney is unafraid of new technologies as a result of its focus on content. I have no doubt that Walt Disney hopes (or possibly knows) that hologram companies will distribute its content in the not so distant future. The recent launch of Disney Life in the United Kingdom represents an example of this. This app allows kids to watch Disney movies and television shows in addition to listening to music and books.
Walt Disney’s strategies have paid off in the form of excellent fundamentals and solid stock returns. Over the past five years, its revenue, net income and free cash flow grew 6.6%, 16.2% and 8.3%, respectively, compounded annually. Its return on equity comes in at 17%. Good fundamentals also translated into superior returns for shareholders. Over the past five years the company earned its shareholders 153% versus 58% for the S&P 500 (see chart below).
Walt Disney stock currently trades at a P/E ratio of 21, which is roughly equal to the PE ratio of the S&P 500.
Worries abound about consumers moving away from traditional cable packages more commonly known as “cord cutting”. As a result, Walt Disney’s stock trades at 17% off its 52 week high allowing investors to get in at a lower price. However, I am in agreement with Walt Disney’s management that the company will continue to thrive as long as it continues to put out high quality content, which serves as a draw to the final consumer. If the company ever gives up on providing a quality experience for its audience, then it will be time to sell the stock.