Walt Disney Co (The)

-1.75 (-1.83%)
7:59:53 PM EDT: $94.22 +0.14 (+0.15%)
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Disney Is Absolutely Crushing It But a Huge Risk Looms



What once was a "boring" blue chip has now turned into a flexible, adapting, innovative, and content collecting machine. The bullish argument for Disney is that CEO Bob Iger, by collecting the Star Wars, Pixar and Marvel content into the Disney juggernaut has created a large pool of profits for several years to come. Bulls argue that that the once boring (and stuck) stock is poised for larger revenue, profits and a higher price. Further, the company has recently been saying that ESPN may bypass cable for streaming "eventually." Bob Iger said, "I think eventually ESPN becomes a business that is sold directly to the consumers."

I remind all readers that a report just like this one is available for any company for free on CMLviz.com. No e-mail. No login. Free. Forever. Period.

A live streaming service for sports events is a beautiful idea, beautiful capitalization on an already powerful asset and yet another creative way Disney has moved from old school to new school and mitigated risk of cable cord cutters. Further, now that Disney owns George Lucas' company, (in 2012) it has loads of money to make in the upcoming Star Wars movies.

Morgan Stanley's Benjamin Swinburne forecasts that the new Star Wars film could add $2 billion in retail consumer merchandise sales to the franchise's nearly $3 billion in annual sales. That would net Disney an incremental $200 million in license fees. Disney should also clear about $100 million in video game revenue in 2016, Swinburne estimates (Source: TheStreet.com).

From an execution point of view, Disney has seen revenue (TTM) and net income (TTM) rise to all-time highs for more than five consecutive quarters. The company got the cover story in the May 30th publication of Barron's where author Jack Hough notes that the firm "is a wizard at wringing profits from its theme parks and cruises, hit films and merchandise sales."

So the company is going to rip on earnings, right? Well, this good news hasn't gone unnoticed by the equity market and the stock has risen nearly 36% in the last year. If we plot price to sales at each quarter end for the last 15 years, we do see that Disney now has a valuation component to worry about.

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For the record, Disney's current price to sales is actually at 3.96, so it's off the chart (literally).

Technicals   |   Support: 117.85   |   Resistance: 119.58   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

DIS has a four bull (high rated) technical rating because it's trading above both its 50- and 200-day moving averages. We do note that the stock is trading below the short-term 10-day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-04 $1.39 $13.6 billion $13.7 billion $12.5 billion M Provided by ZACKS

Here is a summary of the core fundamentals that drive the four star fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 50,707 47,104 43,765

Operating Margin (QTR) 1.332 1.34 1.26 FALLING

Net Income (TTM US$ Millions) 8,034 6,998 5,970

Levered Free Cash Flow (TTM US$ Millions) 5,635 6,968 5,698 FALLING

Capital Expenditures (TTM US$ Millions) 3,857 3,036 2,792

Stock Returns and Chart

DIS is up +3.6% over the last three months and up +23.4% over the last six months. The stock price is up +33.6% over the last year and more than 70% over the last two-years.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom). The name for this trend is very technical, it's called ,"stock goes up."
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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 50,70747,10443,765

Aside from the stock price, revenue (TTM) is probably the most breathtaking trend. Revenue on an annual basis has risen 13 consecutive quarters to all-time highs for each quarter (five consecutive quarters triggers a trend which drives the fundamental rating higher.)

Revenue over the trailing twelve months (TTM) for DIS is up 8% from a year ago and 16% over two-years. With the Star Wars franchise in its back pocket, a potentially innovative approach to monetizing its powerhouse ESPN (innovative for Disney) and the wonderful expansion of the international box office, there is room for this company to grow.

What do all these numbers mean?
DIS's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 1.3321.341.26FALLING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter Disney showed a ratio of 1.33. While the number is down from a year ago, it's actually up from two-years ago. While these numbers seem small, they are not. A giant like Disney (DIS) raising its operating margin over a few years this much is quite an accomplishment. The franchising business is also a very high margin business.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.34. In the last year we can see operating margins are decreasing but are greater than 1.0 for the most recent period.

DIS's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was negative (lowers the rating a little bit).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) 8,0346,9985,970

With the rising revenue and generally (longer-term) rising operating margin, earnings are following. In fact, Disney has broken its own all-time highs in earnings for seven consecutive quarters to a most recent trailing-twelve-month level of over $8 billion. That's an increase in the most recent year of 14.8%. Those seven consecutive quarters also qualify as a "trend" and trigger a higher fundamental rating.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).

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Levered Free Cash Flow (TTM US$ Millions) 5,6356,9685,698FALLING

So with all this good stuff, the question can be asked, "why is this not a five star rating?" That's a fair question, and here's the fair answer.

Levered Free Cash Flow (TTM US$ Millions) (which is a critical determinant of stock price since market cap is the present value of all future free cash flows) for DIS is falling down 19% year-over-year.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.

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Capital Expenditures (TTM US$ Millions) 3,8573,0362,792

Free cash flow has been hurt by expenses (investments) in the future. This is a great chart for DIS if you're a bull. Capital Expenditures (CapEx) (TTM US$ Millions) is trending higher meaning that for at least five consecutive quarters (seven in this case) it's been rising. Several consecutive increases in capital expenditures may be a sign of solid investment in the future (if costs are under control). Note the trend in the chart below.

Capital Expenditures (TTM US$ Millions) in the most recent quarter for DIS was $3.85 billion, up 27% from a year ago and 38% from two-years ago. The firm is investing in theme parks and other assets. It is no longer asleep, and in fact, it has become very much awake and the stock market has noticed.

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars.

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Disney has been pouring money into CapEx while revenue and earnings are hitting all-time highs. The acquisition and collection of assets surrounding the most powerful brands is a stroke of genius that could produce more revenue and earnings all-time highs for considerable time. Further, there's a real chance at innovation in the streaming video realm. An ESPN streaming service protects Disney from the undeniable "unplugging" of cable that the United States is realizing. This is an innovation and a risk mitigating strategy at the same time.

Bob Iger has breathed life into this company and the only reservation I have is simply that the stock is killing it and perhaps the realization of all these wonderful phenomena must catch up to the stock price. In other words, the risk here is a valuation call more than a business execution risk. Well done, Disney. You are very much awake.