An Impressive Recovery at Disney

06/21/2017 2:50 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Walt Disney (DIS) has been volatile during the past year, but an impressive recovery for the shares is underway, says Roy Ward, editor of Cabot Benjamin Graham Value Investor.

The firm entertainment and media enterprise has five business segments. Media networks includes ABC and ESPN (44% of 2015 revenue). The parks and resorts division comprises Disneyland, Walt Disney World and a cruise line (31%).

The remaining three divisions are: studio and entertainment (14%), consumer products and retail (9%) and interactive digital media (2%). In addition, Disney earns royalties from Tokyo Disneyland and manages Disneyland Paris and Hong Kong Disneyland.

Disney’s recent film successes include Zootopia and Finding Dory, which set box office records. The company has scheduled releases for several more potential blockbuster movies during the next three years, including Captain Marvel, Frozen, Toy Story, two more Star Wars movies and others.

ESPN, Disney’s cable sports network, continues to experience declining subscriptions, which peaked in 2010. In addition, Disney World attendance in Florida declined slightly because of a drop in visitors from economically troubled Brazil.

The company opened its much-anticipated Shanghai Disney Resort in June of last year, which will bolster results going forward.

For the quarter ended March 31st, Disney produced solid numbers despite further problems at ESPN. Sales advanced 3% and EPS climbed 15%. Disney movie studios and theme parks and resorts produced profit gains of 21% and 20% respectively.

Sports cable network ESPN suffered weak results again. Consumers prefer video streaming which takes market share from traditional cable TV.

Disney will introduce an ESPN-branded subscription streaming service soon. The company is also cutting costs and laying off 100 journalists and on-air commentators at ESPN.

The opening of Shanghai Disney recreation park plus five new Disney movies slated to be released before the end of 2017, including Star Wars Episode VIII, will provide continued growth during the remainder of 2017.

Lower advertising revenue and fewer ESPN viewers crimped sales, but management expects modest EPS growth in 2017 and “more robust growth” in 2018 and beyond.

Disney has increased its dividend more than 10% nearly every year during the past decade at a compound growth rate of 19% per year. The dividend is paid twice a year and currently yields 1.5%. The company’s payout ratio (dividend per share divided by EPS) is only 27%.

DIS is now very attractively priced at 16.8 times current EPS. I expect DIS to climb 18% to reach my Minimum Sell Price of $124.15 within one year. Buy at $107.24 or below.

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