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Not So Mickey Mouse: Investment Lessons From Disney

The June 4 issue of Variety carried a news item that caught my eye. Nothing on the magnitude of “Wall Street Lays an Egg,” as the show biz journal famously reported about the 1929 Black Tuesday stock market crash. Rather, it’s a milestone achieved this week by the film studio division of Walt Disney (NYSE: DIS): $2 billion in international box office sales so far this year.

Unprecedented for Disney, the multi-billion-dollar movie windfall is fueled in large part by the wild popularity of Pirates of The Caribbean: Dead Men Tell No Tales, the fifth film in that lucrative franchise. Internationally to date, Johnny Depp’s latest outing as Captain Jack Sparrow has earned more than $500 million and continues to rake in the bucks.

In this uncertain investment climate, you should gravitate toward the stocks of companies with steady management, strong balance sheets, and brand-name products and services that are in persistent demand with consumers around the world. Walt Disney epitomizes this truism, making it an opportune “defensive growth” play.

The timeless investment lessons of Walt Disney are worth keeping in mind, as Wall Street wrings its hands over worsening political risk at home and abroad.

Steve Leeb weighs in…

Dr. Stephen Leeb, chief investment strategist of The Complete Investor, Real World Investing, and Aggressive Trader, has this to say about Disney:

“Disney, with two resorts in China plus a PG-rated motion picture library, should continue to grow its film and resort franchises alike. The recently opened Shanghai resort operated at maximum capacity throughout the Chinese New Year, helping push resort margins to an all-time high.

The Hong Kong resort after a mid-decade slump is back on track. Asia has been the company’s fastest-growing segment, a trend that should continue as China’s middle class expands, which is why we think Disney’s growth will be 2 percentage points higher than the Street expects.”

What’s the Street’s beef with Walt Disney? It all boils down to Disney’s ESPN cable sports division, the boogeyman for analysts. The growing rate of cancellations among ESPN subscribers is weighing on DIS stock.

Cable “cord cutting” is especially pronounced among younger viewers who are embracing cheaper media platforms on their mobile devices. But this dynamic, while very real, is more than offset by Disney’s tremendous assets, which include classic movies and iconic characters that will be household names forever.

Disney was founded in 1923 as a cartoon studio, but Walt Disney soon proved himself to be an American renaissance man, as groundbreaking in his day as Charlie Chaplin. Today, Uncle Walt’s empire is the globe’s best-known media and entertainment behemoth, sporting a brand name that’s been beloved ever since Mickey Mouse made his debut in the black-and-white cartoon “Steamboat Willie” in 1928.

10 million and counting…

Nearly a century after its founding, Walt Disney boasts several strengths that most media companies can only envy, especially its diversification. The company operates in a wide range of businesses, including theme parks, TV stations, retail stores, and cruise lines. These entities are integrated for synergies that throw off consistently high margins. Disney’s profit margin currently stands at 16.6%, compared to the average of 12.5% for its peers.

The company’s biggest source of revenue (45% in the latest quarter) derives from the media networks division, which owns the ABC television network and several popular cable channels, including ESPN, ABC Family, the Disney Channel and A&E.

What’s more, Disney owns the rights to some of the most popular films in cinematic history, constituting a portfolio of intellectual property that will continue generating revenue for decades to come.

Disney pioneered sound cartoons, color cartoons, feature length cartoons, movies with animation and human interaction… the list of creative landmarks goes on. The company also gave the world the first theme park.

In 1966, the year Walt Disney died, the entire Disney company was worth $80 million. The company’s market cap is now $166.7 billion. Disney’s $4 billion purchase in 2012 of Lucasfilm (and by extension the legendary Star Wars franchise) has turned out to be a huge moneymaker, as Disney aggressively cross-markets every new entry in the space opera. The next planned installment is Star Wars: The Last Jedi, scheduled for release in December 2017. Every new Star Wars movie is a shot of steroids for Disney’s operating results.

The company’s theme parks also provide steady revenue and, as Dr. Leeb points out, they’re positioned to benefit from rising middle classes in emerging markets.

Walt Disney in June 2016 opened the gates to Shanghai Disney Resort, the company’s massive new theme park in China. After five years of construction and expenditures of $5.5 billion, the Shanghai park is hitting its stride. On May 19, Disney announced that the park had welcomed its 10 millionth guest.

The average analyst expectation is that Disney’s year-over-year earnings growth will reach 18.2% in the next quarter, 4% in the current year, and 13.4% next year. My calculations show that the company’s earnings growth over the next five years should hit at least 9%, on an annualized basis.

Since Disney announced major layoffs at ESPN on April 26, DIS shares have fallen about 8%. Regardless, Goldman Sachs (NYSE: GS) recently added Disney to its “conviction buy” list and raised its earnings estimates on Disney through 2019. Goldman Sachs said Disney should post “record studio profits” in fiscal years 2017 and 2018.

Disney is reasonably priced in an overbought market. The stock’s trailing 12-month price-to-earnings ratio (P/E) is only 18.7, compared to 22.1 for its industry. Wall Street darling Netflix (NSDQ: NFLX), by contrast, trades at an absurdly high trailing P/E of 214.5. Disney also has total cash on hand of $3.8 billion, a war chest for future investments in movie franchises, theme parks, and digital entertainment innovations. The Mouse is positioned to roar.

Got any questions or comments? Drop me a line: I reserve the right to edit any letter for the sake of concision and/or clarity. — John Persinos

Simple trades for rapid profits…

The consensus of our investment strategists is that a stock market downturn is likely this year. No one bangs a gong to announce the start of a correction, but you can take proactive measures by sticking to quality.

When it comes to the proven virtues of value investing, Walt Disney remains a case study. But there’s another way to navigate today’s fraught conditions.

Jim Pearce, chief investment strategist of Personal Finance, put his team of analysts to work on back-testing the results of a trading system called The Rapid Profits Matrix. What they found is astounding. For more than 10 years, the system has averaged at least 12 triple-digit annualized returns each year.

And yet, this is a low-commitment system. You’re not day trading, with a nervous eye on every stock movement. Nor are you fretting about the news, like the Fed raising or lowering interest rates… or the latest bombshell testimony in Congress. Instead, you’re confidently executing simple trades that deliver rapid profits.

Want to know more? Watch Jim’s brief presentation.



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Stock Talk



I would love to see ESPN become an over-the-air network. I have no idea how that works as a business proposition but it would be great for sports lovers.



I totally agree with this analysis, especially in regard to the value of the Disney film vault, amusement parks and vacation options. This is a great time to begin a long term investment strategy in Disney. ESPN is one small part of this overall company and I trust that Disney’s Executives will find a a solution soon. As a long term investor, I’m not waiting on the sidelines for this to happen…

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