Image source: Disney.
Continue Reading Below
Walt Disney Co.(NYSE: DIS)stock has been as much of a delight to investors' portfolios over the long term as its product offerings have been to people of all ages since its founding in 1923. It's returned 222% over the 10-year period through Aug. 19, trouncing the broader market's 108% return.
Despite the company posting good-to-great quarterly earnings over the last year, however, the market has sent its stock tumbling 11.6% since it set its all-time high on Aug. 17, 2015 due to much-ballyhooed concerns about"cord-cutting." The market's shortsighted underestimation of the Mouse's ability to successfully navigate the current changing consumer media marketoffers a buying opportunity for long-term investors.
Here are three top reasons Disney stock is a buy:
1. Studio entertainment is unstoppable
The company's flagship movie brand Disney and its three brands astutely picked up through acquisitions -- superhero-focused Marvel, animation titan Pixar, and Star Wars-creator Lucasfilms -- are firing on all cylinders.
For the first nine months of fiscal 2016, ended July 2, studio entertainment's year-over-year revenue jumped 37% to $7.63 billion, while its operating income soared 61% to $2.32 billion. These numbers account for 18% and 18.5%, respectively, of Disney's total revenue and segment operating income.
The company kicked off its fiscal year with the release of the phenomenally successful Star Wars: The Force Awakens in mid-December. The film took in nearly $2.1 billion at the box office, making it the third-highest-grossing movie worldwide of all time, behind only 2009's Avatar and 1997's Titanic.Disney continued to churn out hit after hit in calendar year 2016, as this chart of the year's top-grossing movies worldwide shows:
Data source: Box Office Mojo;data last updated on Aug. 21 at 9:55 a.m. PT.
The House of Mouse's domination of the world's silver screens should continue, thanks to a powerful slate of movies scheduled for release over the next few years. Notably, the Star Wars' stand-alone flick, Rogue One, debuts domestically on Dec. 16.
2. Push into streaming should prove profitable
Disney announced on Aug. 9 that it's investing $1 billion to acquire a 33% stake in BAMTech, a leading video streaming and analytics company formed by Major League Baseball. BAMTech was spun off from MLB's broader digital business, MLB Advanced Media (MLBAM), as part of the deal. The company has an option to buy a controlling stake in BAMTech in the future.
Disney's goal in buying this stake is to ensure that its brands, most particularly ESPN, remain strong, relevant, and vital in a changing consumer media landscape, CEO Bob Iger said on the company's recent third-quarter earnings call.Consumers are increasingly cancelling or slimming down their large cable bundles -- "cord-cutting" and "cord-slimming" -- because of the widespread availability of digital video subscription streaming services offered by companies such as Netflix,Amazon.com,and others. This has resulted in a steady decline in Disney's cable subscribers, with the decline in ESPN subs the most concerning because the sports cable network is extremely profitable.
The entertainment giant's initial plan for BAMTech is to launch a direct-to-consumer ESPN-brandedmultisport subscription video streaming service. Target date for the launch is the end of the year. Investors can almost surely expect Disney to roll out additional streaming services in the future.
In addition to enabling Disney to bring some of its vast collection of valuable content directly to consumers without the involvement of third-party distributors, the BAMTech stake will allow the company to profit from the growth in digital media in general.
3. In the early stages of conquering China
Image source: Disney.
Since Shanghai Disney's spectacular opening on June 16, well over 1million guests have visited the park and the hotel occupancy rate is holding steady at 95%, Iger said on the Q3 call.Moreover, more than 70% of the people of Shanghai -- or nearly 17 million -- intend to visit the park, according to Disney's research.
A sizableportion of the park'svisitors have come from outside the city, Iger stated on the call. That's not surprising, as Shanghai is a vacation destination for people living throughout the country, as well as a top international tourist destination.
Disney Shanghai will be many Chinese consumers' first or at least most intimate experience with a Disney product or service, so it should act as a gateway experience. If folks fromtheworld's mostpopulouscountry enjoy frolicking at thisattraction, they're not only likely to come back for more, but to also seek out additional Disney products to delight them.
An attractive stock valuation
Disney's financial performance has been top-notch and the company has many catalysts for future growth, as outlined in this article. However, these factors alone don't usually equate to an attractive stock, as valuations generally need to be reasonable.
Disney's stock valuation is, indeed, reasonable for such a high-quality company. The stock is trading at 17.8 times earnings, whereas it traded for 22 times earnings a year ago -- and the company's financial performance over the last year has been better than it was a year ago. The price-to-earnings ratio hasn't been this low since early 2013.The price-to-cash flow from operations ratio is now 13.6, whereas it was 17.1 a year ago. The last time it was as low as it currently is was in late 2013.
A secret billion-dollar stock opportunity The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.
Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.