Major Upside in Disney Stock?
When a company is delivering double-digit earnings growth, you’d think that investors would be cheering for it. But that’s not the case for Walt Disney Co (NYSE:DIS) stock. Despite posting solid results, Disney stock tumbled 6.6% year-to-date.
If a company is growing but its stock price is declining, it must mean that the stock was too expensive to start with, right?
That’s not the case either. At $98.08 apiece, Disney stock is trading at 17 times its earnings, which is lower than the entertainment industry’s average price-earnings (P/E) ratio of 19 times.
What’s more is that if you take a look at Disney stock’s financials, you’d see that the company is actually firing on all cylinders.
Disney’s fiscal 2016 ended on October 1, 2016. For the year, revenue increased six percent year-over-year to $55.6 billion. Earnings came in at $5.73 per share, a 17% improvement from the $4.90 per share earned in its fiscal 2015. (Source: “The Walt Disney Company Reports Fourth Quarter and Full Year Earnings for Fiscal 2016,” Walt Disney Co, November 10, 2016.)
Segment-wise, Studio Entertainment was the best-performing one. It brought in 28% more revenue this year, while its operating income surged by an even more impressive 37%.
But this shouldn’t really come as a surprise, given that Disney had quite a few box office hits in this period, including Star Wars: The Force Awakens, Zootopia, The Jungle Book, Finding Dory, and Captain America: Civil War. Notably, Star Wars: The Force Awakens surpassed Avatar to become the highest grossing film of all time in the U.S. just 20 days after its release.
Other segments weren’t bad either. “Parks and Resorts” revenue increased by five percent year-over-year, while segment operating income increased by nine percent. “Consumer Products & Interactive Media” had a three-percent decline in revenue, but segment operating income actually increased by four percent.
And then we have “Media Networks,” the favorite segment of Disney stock bears. They argue that, because consumers are moving from cable television to on-demand video streaming, Disney’s Media Networks—including ESPN, ABC, and the Disney Channel—will have no future.
So, did the segment have a catastrophic year? Not really. In Disney’s fiscal 2016, Media Networks revenue actually grew two percent year-over-year, while operating income from the segment remained unchanged.
The bears do have a point. But rather than slowly becoming irrelevant, Disney is taking a proactive approach.
The company is acquiring a 33% stake in video streaming company BAMTech. You might not have heard of this company before, but it plays an important role in today’s video streaming industry. BAMTech is behind the streaming services for HBO Now, the National Hockey League, Major League Baseball, and the WWE Network. (Source: “The Walt Disney Company Acquires Minority Stake in BAMTech,” Walt Disney Co, August 9, 2016.)
At the same time, don’t forget that Disney also owns 30% of Hulu, LLC. While Hulu is not as popular as Netflix, Inc. (NASDAQ:NFLX), its near-12-million subscriber base is nothing to sneeze at.
The Bottom Line on Disney Stock
Bottom line: the company is far from over. Cord-cutting is still a concern, but Disney also has stakes in the online video streaming industry. These stakes might not be enough to cause Disney stock to shoot through the roof, but they could ensure that the company remains relevant when more consumers embrace on-demand video streaming.
What’s more important is that going forward, Disney has its own growth drivers. Parks and Resorts could be a catalyst with its newly opened Shanghai Disney Resort in China, and the ongoing Star Wars extension to its existing theme parks. In Studio Entertainment, upcoming movies like Rogue One: A Star Wars Story, Beauty and the Beast, and Guardians of the Galaxy Vol. 2 are almost guaranteed to become box office hits.
There are companies with better outlooks than Disney. But at today’s price, Disney stock’s value is too hard to ignore.