Disney: Still A Fair Deal

by The Compound Investor

The recent history of Disney stock (DIS) provides a good insight into long-term investing. Take the most recent twenty year period as a neat 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 earnings.

What followed next? Something resembling a lost decade in terms of shareholder returns. A $10k tranche of Disney shares purchased at this point in 1998 was only worth $14.4k by November 2010. Or put another way, Disney stock barely managed to best inflation in that twelve-year period. Note also that those returns assume the continual reinvestment of dividends into more 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. Those figures had risen to $39.70 and $7.08 respectively by Disney’s 2018 financial year.

Media Networks

Now, If you were to choose one of Disney’s five operating segments that appears most at risk from streaming 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. I mean, ESPN boasted 92m subscribers back in 2015, and that figure was as high as 100m back in 2011. It had fallen to around 86m by the end of fiscal year 2018. As you would expect, losing almost 15% of subscribers from the cash cow has impacted its bottom line. Back in 2015, for instance, Media Networks contributed operating income of $7.79b to the wider Disney empire. That was down to $6.63b as of last year.

Obviously this looks like bad news and lends credence to the armageddon pieces that occasionally 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 $6.9b. The comparable figure was up to $9.1b by its 2018 fiscal year.

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? It is almost entirely a result of the PE ratio dropping from over 20 to 16. Of the past fifteen years, only five have seen a lower average PE for Disney stock. History would tend to suggest it is a fair deal right now.

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