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If you’ve been sitting on the sidelines watching The Walt Disney Co. (NYSE: DIS) stock go up to the third star on the left and straight on ’til morning, now is the time to pounce. The stock fell 9.2% Wednesday after the company reported fiscal third-quarter earnings.
The reasons for the fall are ridiculous, if you understand that Disney is a long-term success story that will only get better.
I’ll run through the earnings report and show you why I’m not worried – and why Disney is still a value.
Segment Breakdown
Media Networks saw very respectable 5% revenue growth, with 4% increases in operating income, but Broadcast saw a 15% decline in operating income. The issue here is that subscriber losses at ESPN have everyone worried.
Inside sources tell me that Disney has big expectations for ESPN to continue growing its audience, and clearly CEO Bob Iger is trying to talk the network up. The worry is that cord-cutting and aging sports fans are going to harm revenues at ESPN.
What I think everyone forgets is that ESPN has cornered every sports market. Even if cord-cutting occurs, there are so many die-hard sports fans that they will pay – and likely pay a premium – to watch their teams on streaming media. I’m not worried.
Parks and Resorts grew revenue 4%, with 9% growth in operating income. Consumer Products grew revenues 6%, with a whopping 27% in operating income because margins are very high in this segment. Now, this segment is key, because it ties into Studio Entertainment, which saw a 13% increase in revenues and 15% increase in operating income.
As more and more films and TV shows come out, those consumer products are direct beneficiaries. That segment is where all the toys and plushies come from. It is also fundamental to understand that Disney has content to last it the next hundred years, and I’m not joking.
Bottomless Well
Through its purchases of Pixar, Marvel and Lucasfilm, Disney has generations of stories to be mined from already existing blockbusters and new material. Pixar’s brain trust has shown it can make great movies over and over again. Marvel has 5,000 characters it can draw from, and if it can make hits out of “Ant-Man” and “Guardians of the Galaxy,” it can make hits from anything.
Plus, like James Bond, it can just replace actors in their iconic roles as they move on to new things. Of course, it also has Lucasfilm and a new generation of “Star Wars” and “Indiana Jones” movies.
This is what makes Disney a buy for the next several decades. The recent Disney selloff is but a short-term blip in one segment where I think the markets are overreacting.
The one area Disney really needs to figure out is interactive. Despite generating $208 million in revenue, the segment crapped out and went from a $29 million operating profit to break-even.
Interactive is not the slam-dunk many people expected. I was shocked when they shut down Toontown. It’s bizarre that the game site could be resurrected by a free, crowdsourced effort, yet couldn’t make money. Interactive needs a vision, and I suspect it needs to create console games that tell great stories, especially those that tie into existing franchises.
Overall, Disney remains a winner. It generated $4.5 BILLION in free cash flow this quarter. That’s right – it generated $7.5 billion in cash and had so much of it that the company spent a third of it without batting an eye.
While net income was up about 11.5%, you are looking at a company trading at about 20 times fiscal year 2015 earnings. I think Disney is worth a 14 or 15 multiple, so yes, it is expensive as a near-term stock. However, if you intend to hold forever, as I do, it’s still cheap.
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