Disney: "Diamond in the Rough"

04/28/2017 2:50 am EST


Charles Mizrahi

Editor, Insider Alert

We consider The Walt Disney Co. (DIS) to be a diamond in the rough. Disney is one of those stocks that, based on our analysis, continue to sell at a bargain price, suggests Charles Mizrahi, editor of Hidden Values Alert.

In other words, it’s a large-cap company that we feel is mispriced by the market and offers investors a very nice return.

We added DIS to the Prime Time model portfolio in July 2016 at a time when, based on our analysis, it was trading for an attractive price.

When we dug a little deeper, we found that the market grossly undervalued DIS, providing us with an opportunity to join a well-run company with one of the most valued brands.

Fears over the decline of ESPN subscribers led investors to jump ship, leading to a 20% decline in share price, which offered us a very good entry point.

DIS is a media conglomerate that runs some of the largest movie studios, cable and broadcast TV channels, and Disney resorts. Despite some drag in its ESPN subscriptions, DIS has grown its revenue by 5% year-over-year for the past 10 years... which is very impressive for a company founded more than 84 years ago.

The Disney brand is listed as #8 on Forbes World’s Most Valuable Brands; Forbes estimates the brand’s value at close to $40 billion. The Disney brand draws customers to the box office, its merchandise to Disney Resorts.

While other studios have hot and cold streaks of producing blockbuster movies, DIS continues to ring the register at the movie box office.

The company owns blue chip studios — Marvel, Walt Disney Pictures, Pixar, and Lucasfilm —that have excellent track records and a history of producing blockbuster movies.

DIS topped the box office in 2016 with four movies grossing more than $1 billion (Captain America, Rogue One, Finding Dory, and Zootopia). The Jungle Book just missed the billion-dollar mark.

Over the next three fiscal years, DIS is releasing more blockbuster films, continuing to leverage its franchise with four Marvel films, two Star Wars films, Frozen 2, and Cars 3.

DIS’s investment in Shanghai Disneyland and other projects have dented earnings over the short term, but we believe the company is very well positioned for long-term growth.

ESPN is the reason many analysts are giving for holding back DIS’s share price. Subscriptions have fallen from a peak of 100 million in 2011 to 90 million in 2016.

In the face of declining TV subscribers, ESPN has expanded its online presence. The ESPN online network is the largest in sports in total visits, with a 29% market share of online sports content.

These services may help slow or even reverse declining subscriptions in ESPN. While ESPN accounts for 25% of DIS’s earnings, the other 75% of DIS’s earnings are starting to kick up into high gear.

The market continues to value DIS over the short term and seems to be missing its strong management team, outstanding brands, and pipeline of potential blockbusters.

We believe DIS is a heads-you-win (spin off or acquisition), tails-you-win-a-little-less (long-term investments start paying off ). Either way, we are bullish on DIS and are glad we have a great company at an attractive price for our portfolio.

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