New magic at Walt Disney

Media giant Disney is a top-class value stock. Now a move into streaming will fuel growth.

932_MW_P37_Companies

Theme parks with Star Wars attractions should prove popular

2015 Handout

Walt Disney (NYSE: DIS) is embarking on a pivotal year. It has just completed its $71bn takeover of 21st Century Fox. It expects more box-office blockbusters, while the first-ever Star Wars theme park attractions should draw big crowds. Most importantly, it will make a big push into streaming: delivering entertainment ("content") to computers and televisions directly over the internet, thus challenging the likes of Netflix.

Catching up with Netflix

By building a strong streaming presence through its new Direct-to-Consumer business, Disney intends to rectify this. Its new offering, Disney+, will give subscribers direct access to the formidable library of the Disney/21st Century Fox movies and TV shows as well as Star Wars, Marvel, Pixar and National Geographic content. This material will gradually disappear from the offerings of other streaming services, which have hitherto been showing Disney content under a licensing agreement with the entertainment giant. The streamers will find life tougher as the deep-pocketed "old guard" media companies enter the sector themselves, fragmenting audiences and forcing incumbents to produce even more original content while the quality bar and costs rise.

Disney's odds in this context are favourable. It has first-class content and sufficient experience, particularly as it owns 60% of Hulu, a popular streaming service with 23 million users. It has know-how, as the owner of most of BAMTech, a streaming video technology leader. And it has the tried-and-tested imagination to build an offering around what its audiences want, whether that be new films, shows, tie-ins or interactive programming (whereby people can influence the content onscreen). Perhaps Disney's biggest asset, however, is its powerful brand, which is deeply embedded in global popular culture.

In turn, Disney gets what helped make Netflix a winner: detailed user data, the holy grail of modern marketing and sales. With access to viewing habits and preferences, it can produce bespoke offerings and suggestions for subscribers, building loyalty. It will also have valuable data for marketing, advertising and new content origination.

A promising trial run

Given the outlook, Disney appears under-appreciated. The shares are 10% cheaper than the overall market and trading 25% below their longer-term valuation range. With strong management, profitable businesses and a well-managed balance sheet, even in its present form Disney is worth tucking away as a high-quality value stock. The potential bonus comes from a reappraisal of its value as investors begin to factor in new growth driven by streaming.

Kicking the tyres... a $161bn behemoth

It writes and draws new projects; films, produces and distributes them; operates TV and radio broadcasters (including ABC, the national US TV network), cable companies and publishers; builds and runs theme parks comprising attractions, dining and accommodation; offers a themed cruise holiday fleet; and sells related merchandise and licenses its brands to third parties.

932_Companies

Management is led by Bob Iger who first joined the ABC TV subsidiary in 1974. he has had a long career and a successor is expected to be announced in the not-too-distant future. The shares are trading on a price/earnings ratio of 15, and the stock has an annual dividend yield of about 1.6%. As the acquisition of 21st Century Fox beds in and further streaming news is released, forecasts are likely to be refined. For now, at least 20 analysts cover the company, with most deeming the stock "buy" or "strong buy". The next announcement, on Tuesday 5 February, will feature first-quarter earnings. Disney+ will be unveiled for the first time at the Disney Investor Day on 11 April.

Recommended

Share tips of the week – 21 January
Share tips

Share tips of the week – 21 January

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Jan 2022
Seven cheap defence stocks to buy now
Share tips

Seven cheap defence stocks to buy now

We’ve got used to a world without war between major powers, but that era is coming to an end as Russia threatens Ukraine and China eyes Taiwan. Buy de…
21 Jan 2022
Invest in VCTs: tax-free investments set to break records
Investment strategy

Invest in VCTs: tax-free investments set to break records

Generous tax breaks make VCTs – venture capital funds – an attractive supplement to pensions.
21 Jan 2022
HubSpot: a tech stock set to tumble
Trading

HubSpot: a tech stock set to tumble

US tech stocks have had a fantastic couple of years. But this year is unlikely to be so bullish for high-fliers that can’t turn big profits.
18 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022