The market has been down on Walt Disney Co (NYSE:DIS) since its most recent earnings report on August 4. In the August 4 third quarter earnings report the company missed analysts’ revenue expectations by $130 million. Superior revenue growth is one of Disney’s greatest strengths and the slight miss for the quarter has sent the stock price down approximately 17%.
The revenue miss was a catalyst for the stock price’s descent; however, the stock price drop has also been influenced by a few other factors. First the revenue miss. A revenue miss for Disney will always cause investors to question the firm’s value because of the high P/E multiple it commands in comparison to its closest competitors, namely Twenty-First Century Fox Inc (NASDAQ:FOXA) and CBS Corporation (NYSE:CBS). Additionally, the market has been extremely volatile since the August 4 earnings report, due to high levels of uncertainty around the entire U.S. market as the Federal Reserve is on the brink of increasing the federal funds rate and pushing interest rates higher for the first time in nine years. The stock price’s descent has created a buying opportunity for investors in the current environment given Disney’s superior revenue generation capabilities overall.
Insider Monkey points out that hedge funds’ long picks can generate alpha, and the top holders of DIS among hedge funds largely held on to their positions. Although there was some jockeying, the aggregate investment by hedge funds in DIS increased despite the drop in the number of funds holding DIS shares. Fisher Asset Management upped its position slightly by 1% to 8.45 million shares, while Lansdowne Partners slightly trimmed its stake by 1% to 8.32 million shares. Diamond Hill reduced its position by 7% to 2.4 million shares, and Adage Capital did the same by 16% to 1.98 million shares. These reductions, however, aren’t a cause for concern as these funds trimmed their positions before Disney’s latest earnings release. With the drop in the stock price, these same funds may show they have increased their positions when their filings dated at the end of September are released. Both Diamond Hill and Adage are more in the value mold, looking for bargains, so if the next filings show that they have increased their investments in DIS, it shouldn’t be much of a surprise.
When you look at Walt Disney Co (NYSE:DIS) in comparison to its peers, you see why its stock is vulnerable to the ebb and flow of its revenue production cycles. In comparison to its closest competitors, it trades fairly modestly in terms of P/B. Its TTM P/B is 3.74 versus a TTM P/B of 3.46 for CBS Corporation (NYSE:CBS) and 3.09 for Twenty-First Century Fox Inc (NASDAQ:FOXA). However, it demands a slightly higher P/E multiple given its larger market cap and superior revenue generating ability. When the company is posting strong revenue, its higher P/E is justified. In the current market, its forward P/E is currently 18.42 versus a forward P/E of 13.55 for Twenty-First Century Fox Inc (NASDAQ:FOXA) and 10.2 for CBS Corporation (NYSE:CBS). It also has a slightly higher dividend yield which also justifies its slightly higher P/E. Its dividend yield is 1.76% versus a dividend yield of 1.13% for Fox and 1.39% for CBS. In terms of market cap, the slightly higher P/E is warranted as it trades fairly evenly with its large-cap stock peers. The Dow Jones Industrial Average has a forward P/E of 15.1.
Overall, its credibility has helped it to earn a higher P/E multiple; thus, one slightly lower quarter should not send the stock price down 17%. Its past credibility and superior position in the industry can be evidenced by the revenue growth it has posted in comparison to its peers. It has TTM revenue growth of 8.37% versus -9.04% for Fox and -1.42% for CBS. Similarly, this is also shown on a three year basis. It has three year revenue growth of 6.08% versus 4.98% for Fox and 0.41% for CBS. It has a slightly different financing structure than its peers, so its net earnings per share growth has been satisfactory; however, its gross margin comparisons again show its superior industry lead. It has produced a TTM gross margin of 45% versus 36% for Fox and 40% for CBS. Its operating margin further illustrates this point. Disney’s operating margin for the last twelve months is 24% versus 20% for Fox and 19% for CBS.
In the past, the market has rewarded Disney for its revenue growth and superior operating abilities. As long as it continues to post superior revenue growth, the market is going to continue to allow it to trade at its current multiples. Given the firm’s current product rollouts, this should not be a problem for Disney. Overall, no other competitor in the industry is launching entertainment products that can match the revenue production of Disney right now.
It currently has on tap the release of Star Wars: The Force Awakens on December 18 which will significantly influence its first quarter and 2016 revenue, specifically adding to sales revenue in its Studio Entertainment segment. While the movie release does not occur until December 18, sales from affiliated products are already underway and should significantly impact fourth quarter revenue in Consumer Products for 2015. Added sales revenue from Frozen and Avengers should also help the Consumer Products segment overall to see annual revenue growth of approximately 15%.
In Studio Entertainment the firm also has a continued rollout of Star Wars films planned. In addition to the release of The Force Awakens, the firm also has annual releases of Star Wars films planned through 2019 which should help Studio Entertainment see continued minimum annual sales growth of 5%.
These are the firm’s main strengths as it nears the end of 2015. However, it also has a whole host of other revenue sources that help it continue to maintain its strong market share. Specifically, its cable network channels Disney and ABC have been thriving for the firm with ABC leading the industry in primetime ratings growth and Emmy award nominations.
While the market overall has been hard on Walt Disney Co (NYSE:DIS)’s stock in recent weeks, analysts have posted high projections for the firm in anticipation of its product rollouts. For the fourth quarter, analysts are projecting revenue growth of 9% and earnings per share growth of 27%. For the full year, analysts expect revenue growth of 7.4% and earnings per share growth of 17.6%. Given the company’s sales initiatives across all of its product lines, Disney should have no problem meeting and exceeding these expectations.
Overall, it appears Disney’s losses are overextended and for investors, now is an opportune time to buy this leading entertainment company. The stock is down on the previous quarter’s slight revenue miss and has also fallen below its fair value of $118 given the market’s extreme selloff in recent weeks.
Both of these factors are going to correct in the near-term to the benefit of Disney. The Fed has opened a marginal trading window for investors after allowing more time for the economy to regain balance before affecting Fed policy that would increase interest rates. Furthermore, Disney’s sales initiatives have it positioned for a strong final quarter of the year which should lead to annual revenue growth of at least 7.4% further supporting its superior revenue generating abilities in the industry.
Disclosure: The author has no positions in Disney or other securities mentioned in the article.
