Can The Walt Disney Company (DIS) Stay Hot?

Few stocks on the market have had the kind of decade The Walt Disney Company (NYSE:DIS) stock has had. The stock is up 254% when you include dividends, and the company has spent billions on adding content to solidify its position as an industry leader.

DIS Total Return Price data by YCharts.

But with The Walt Disney Company (NYSE:DIS) stock now trading at 20 times trailing earnings and yielding just a 1.2% dividend, can its strong run continue? I think there are three reasons it can.

Content is king
Since Bob Iger took over as CEO, he has pulled Pixar, Marvel, and Lucasfilm into the fold, showing a commitment to content. This is important right now because content is king. We’re moving to a streaming business model from distribution models like cable, the box office, and DVDs and the companies who own content hold all of the leverage going forward.

Some recent signings show just how lucrative the content business can be. Netflix, Inc. (NASDAQ:NFLX) is reportedly paying $300 million per year for early release films from The Walt Disney Company (NYSE:DIS) and a new deal with Amazon.com, Inc. (NASDAQ:AMZN)‘s LOVEFiLM service will bring older films and original shows to the service. Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) are fighting each other for content and The Walt Disney Company (NYSE:DIS) is in a position to play the companies off each other and make more money in the process.

The difference between content owners and content distributors is stark and you can see it in financial results. Below is a chart of net income for the last three years of content owners The Walt Disney Company (NYSE:DIS), Time Warner Inc (NYSE:TWX), and Viacom, Inc. (NASDAQ:VIAB) compared to two of the biggest streaming distributors, Netflix and Amazon. Which side of the business would you want to own?

DIS Net Income TTM data by YCharts.

Disney’s incredible content on the big screen is a driver of the company, but that’s before including the potential for Disney to develop its own streaming networks or a plethora of options for its best asset: ESPN.

ESPN is the king of sports media
The media networks business is the largest at Disney and cable networks, especially ESPN, drive it. In the first quarter, cable network revenue grew 9% to $3.5 billion and operating income was up 15% to $1.7 billion, an incredible 50% operating margin.

ESPN hasn’t created an impenetrable competitive moat, but its sheer size allows it to purchase high-value content that few other sports networks can afford. But here’s what we really need to know as investors: There’s no other channel that would start a riot faster if cable companies dropped it.