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Andreas in Gainers & Losers,

Investment idea - Disney

I am upbeat about the shares of Walt Disney (DIS), one of the largest financial conglomerates in the entertainment industry. The company recently released a strong financial report for 4Q15. Quarterly revenue rose 9.1% y-o-y to USD 13.51 bn. Media Networks (+12% y-o-y), Parks and Resorts (+11% y-o-y), Consumer Products (+12% y-o-y) became revenue growth drivers. Analyst fears that the number of subscribers in Media Networks decreases failed to materialize as both the number of TV subscribers and subscription fee increased. Disney launched Disney Life subscription-based video streaming service (currently only in the UK), which means that the company keeps up with modern trends in its content broadcasting methods. Parks and Resorts segment reported an increase in park attendance. Notably, Disney plans to open a big entertainment park in Shanghai, which will boost this segment.

Operating profit surged 27% y-o-y to USD 3.53 bn, while operating margin climbed 3.8 pps to 26.2%. Studio Entertainment (+108% y-o-y) became an operating profit growth locomotive due to the successful release of Ant-Man and Inside Out. Adjusted EPS amounted to USD 1.20 (+34.8% y-o-y), outpacing the consensus by 5%.

The company generates a significant cash flow, which totaled USD 10,909 mn (+11.5% y-o-y) over 12 months of FY15. Disney spent USD 6,095 mn for buyback and USD 3,063 mn on dividends. Semi-annual dividend amounted to USD 0.66 (+15% y-o-y), yielding 1.3%. The company’s management plans to continue share buyback and is ready to spend USD 6-8 bn for this purpose in 2016.

I believe the company will continue to expand rapidly in the coming quarters owing to the release of new films. The 7th episode of Star Wars, The Force Awakens, is scheduled to premiere around year end. I also awaiting the opening of a new theme park in Shanghai and expansion of new streaming TV subscriber base. All of this, coupled with higher dividend and share buyback, will support growth of Disney’s market capitalization in the medium term.

I raised my mid-term fundamental valuation of the company to USD 125 and recommend the name as a Buy. The short-term technical target is USD 120.