The recent history of Walt Disney stock (NYSE: DIS) provides a good deal of valuable insight into long-term investing. Take the most recent twenty year period as a good illustration. Back in the late-1990s/early-2000s Disney shares were exceedingly expensive based on pretty much any valuation metric. Indeed, it was fairly common to see the stock trading well above 30x annual net profit per share.
What followed next? Something resembling a lost decade in terms of shareholder returns. If you bought $10,000 worth of Disney shares at this point in 1998 then by November 2010 your position would only have been worth $14,400. Or put another way: Disney stock barely managed to best inflation over that twelve year period. (N.B. Those returns also assume the continual reinvestment of dividends into more Disney stock).
The history of Disney stock returns, particularly the effect of large gyrations in its valuation, is relevant to anyone studying it as potential investment right now. I say that because you may have noticed that the shares haven’t been up to much over the past few years. After a large run-up between 2009 and 2015 the stock has been trading in a fairly tight range ever since. The narrative you get from financial media is that this is because of media industry disruption. The likes of Netflix, Google’s Youtube and even Amazon are all getting in on the content production and streaming business. The business model of traditional television, and the high margins it affords the likes of Disney, is apparently on the way out.
The thing with that narrative is that it doesn’t quite stack up to the reality of Disney’s business performance. For instance in its 2015 fiscal year the company reported revenue per share of $30.70 and net income per share of $4.90. In Disney’s 2018 financial year (ended September) those figures had risen to $39.70 per share and $7.08 per share respectively.
Now, If you were to single out one of Disney’s five operating segments as the most at risk from the streaming revolution then it would probably be Media Networks. This is the ‘traditional TV’ part of Disney’s business that houses the likes of ESPN, ABC and the Disney Channel. Revenue and profit here is largely drawn from the fees that cable and satellite TV providers pay to host the networks (so called affiliate fees) as well as from advertisements.
A lot of ink has been spilled on how badly some of Media Network’s assets have been doing, particularly sports giant ESPN. In fairness some of the figures have been pretty bad here. For instance, in 2015 ESPN boasted a total of 92 million subscribers. By the end of fiscal year 2018 that figure had fallen to around 86 million. Back in 2011 it was as high as 100 million. As you’d expect losing almost 15% of total subscribers from your cash cow has impacted the bottom line. Back in 2015, for instance, Media Networks contributed operating income of $7.79 billion to the wider Disney empire. Last year (i.e. Disney’s 2018 fiscal year) operating income in the segment was down to $6.63 billion.
That is the bad news and the one bit of evidence that lends credence to the armageddon takes that sometimes appear in financial media. As a reminder that things aren’t that bad, check out what the rest of the business has been up to. In its 2015 fiscal year Disney’s other operating segments – i.e. the theme parks, the movie studio, the consumer products and so on – generated combined operating income of around $6.9 billion. In fiscal year 2018 the comparable figure was up to $9.1 billion.
That is basically a summary of why I remain rather optimistic on Disney’s future. That three year sluggishness you see in the share price? is almost entirely a result of the P/E ratio dropping from over 20x earnings to 16x earnings. Of the past fifteen years, only five have seen a lower average P/E ratio than 16x earnings for Disney stock. History would tend to suggest it is a fair deal right now.