Large multinational companies have been some of this year’s best stock performers. In today’s uncertain economic environment, investors have rewarded companies with well-recognized brand names, solid balance sheets and strong management teams. Walt Disney (NYSE: DIS) is a prime example, and is a stock that we are looking to add to our portfolio.
Founded in 1923 by Walt Disney and his brother Roy, the Disney Brothers Studio, as it was then known, began by releasing a number of cartoons that quickly gained in popularity.
In 1928, Mickey Mouse was introduced in the film Steamboat Willie, setting the foundation for Disney’s enduring connection with children. Walt Disney himself received numerous awards and recognition along the way, while creating one of the largest film studios in the world. Today, Disney is a diversified company with multiple business units, including Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Disney Interactive.
Its Media business consists of popular television networks, such as ESPN, Disney Channel, ABC Family, A&E/Lifetime and SOAPnet. In its most recent quarter, these networks contributed a combined 46 per cent of Disney’s total revenues.
The company also produces original content for television shows on its ABC channel, including Grey’s Anatomy, Private Practice and Criminal Minds. ESPN continues to be the main growth driver in this segment, as the network’s attractive audience demographics and strong ratings enable it to charge the highest fees of any cable channel.
Disney’s Parks and Resorts business features world-renowned tourist attractions: Disney World and Disneyland. The division has performed well, as revenue grew by nine per cent year over year in the company’s latest quarter because of an increase in traffic and strong pricing power.
The company has also been successful in launching these vacation destinations outside the U.S. through international partnerships and licence agreements in Hong Kong, Paris and Tokyo, with a new project, Shanghai Disneyland, slated to open in 2015.
Revenues from its international destinations represented less than 20 per cent of the total Parks and Resorts segment, leaving significant room for growth.
Disney’s acquisitions of Marvel Entertainment for $4.2 billion in 2009 and Pixar for $7.5 billion in 2006 have also made the company a formidable competitor in Hollywood. Marvel’s film The Avengers has already generated nearly $1.5 billion in sales, making it the third-highest-grossing movie in history. In its most recent quarter, operating income from the Studio Entertainment division increased 540 per cent year-over-year, and we expect future movie releases to help drive significant earnings growth at the company.
Marvel and Pixar have given Disney additional content to leverage across its various business units, while contributing valuable technology that has revolutionized computer animation. The company’s proven ability to build long-lasting franchises will also benefit its Consumer Products and Interactive divisions, as it sells more toys, apparel and consumer electronics based on these newly acquired characters.
Although Disney’s success has elevated the company to our watch list, we are not buyers at current levels. At its recent close of $49.47, the stock is trading near all-time highs. Disney’s shares are up 32 per cent year-to-date, an impressive feat considering the company’s nearly $90-billion market value, while the S&P 500 has returned only 11 per cent over the same period.
Disney’s outperformance has been even more pronounced this summer, as it has gained 13 per cent vs. a return of only one per cent for the S&P 500. Although Disney deserves a premium valuation, we believe the stock has moved too far, too fast.
The company’s leading market position and strong execution have caught our attention. Nevertheless, we are price conscious and are not willing to chase any stock after such a sizable advance.
With many valuable assets, we believe Disney is well positioned for continued long-term growth, but we will wait patiently for a pullback in its share price before initiating a position.
Ian Shaffer is a portfolio manager and the president and CEO of Galliant Capital Management,