Has Disney Lost Its Magic Touch?

disney

The Magic Kingdom has certainly lived up to its name of late, at least as far as stock performance is concerned. Shares of Disney has been the best performer on the Dow this year. Its historic run began in February 2014, at about $71 a share and hit a 52 week high of $122 prior to earnings being released.

Disney continued its long winning streak with its latest quarterly report Tuesday, with earnings of $1.45 a share beating analysts’ expectations for the 11th quarter running. Revenue pushed upward to $13.10 billion, beating the year-ago figure of $12.47 billion by a neat 5%.

The stock market Bears came out and cut the shares down to $109 this week. Citing operating income and revenue growth is projected to be in the mid- to high-single digits from Disney’s television networks. CEO Bob Iger on the company’s earnings conference call didn’t help when he said the cable networks experienced “some subscriber loss.”

The Bears argued that subscriber losses do matter because Disney bids on sports programming for viewing on ESPN. It needs subscribers to pay for all of that programming. Cable bundles that include ESPN stations and the Disney channel are very lucrative.

Now one could argue that Disney’s stock was priced for perfection coming into the quarter, trading at 25 times earnings. However, when a stock seems expensive, the Bears only need to spread a little fear to drive the stock price down. In fact, all media stocks got hammered this week.

There is still plenty of magic left in the Kingdom

The movie business continues to do well, spurred along by success from the latest “Avengers” movie. The upcoming reboot of the “Star Wars” franchise is expected to be huge. Analysts predict that “Star Wars” will gross around $2.2 billion globally. The sequel to Frozen is also in the works.

The Disney movie studio is a big catalyst for boosting sales in its consumer products business. Frozen has become a global brand being used in merchandising, video games, theme parks, cruise ships and selling music. I wouldn’t be surprise to see Frozen on Broadway (just like the Lion King) and on Disney’s stars on ice. The new characters in the Star Wars will add even more dollars to the consumer product side of the business.

The theme parks are continuing to drive growth, with higher attendance and more spending. New rides based on successful movies keep consumers coming back again and again. The Shanghai Disneyland Park is scheduled to open next year which could be an added bonus to revenue growth in 2016.

Disney’s media networks, including ESPN, will continue to cause investors to worry. Cable is slowing losing subscribers but Disney could easily sell ESPN and the Disney channel directly to consumers. I am not worried because Disney, unlike other media companies, has a huge library of content to reboot within its media empire.

I still believe in the magic of Disney

The company has embarked on a strategy of reviving and remaking its classic animated films as live action fantasies. Alice in Wonderland, Cinderella and Maleficent (reworking of Sleeping Beauty) were highly successful. Upcoming new releases include Pinocchio, Mulan, Beauty and the Beast, Dumbo, Winnie the Pooh, as well as a sequel to Alice in Wonderland.

Disney has a unique formula of making movies that they can turn into theme-park rides, sell products and cross promote in its giant media empire. In my humble opinion, Disney is one of the few stocks that you could own for the next 10 years and not have to worry.

Disclaimer: I own shares in Disney.

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8 thoughts on “Has Disney Lost Its Magic Touch?

  1. Good article, I admit, I was one of those folks thinking this was already priced to perfection going in, and now I am finding this level extremely tempting. I think I am going to give it at least three days to see what happens, after-all, I was not expecting that second day drop.

    Liked by 1 person

  2. Great post, Rico! I’m actually about to be in Orlando tonight, and I keep hearing about the possible Disney stock problems. I felt the same way- Disney will bounce back. They’ve created quite an empire.

    Like

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