Use The Huge Selloff To Buy One Of The World's Best Companies

Chris Walczak's picture

Friday, August 28, 2015 - 7:30am

by Chris Walczak

Market volatility: it can either be feared or embraced. Shrewd investors know that the market's wild swings are an opportunity to buy shares of good companies that have been oversold. In the last two weeks since reporting its third quarter earnings, The Walt Disney Company (NYSE: DIS) has fallen nearly 20%.

The sell-off comes despite the fact that quarterly results were quite robust. Each of Disney's four main divisions posted strong revenue and operating earnings growth, which led to record per share profits of $1.45, three cents ahead of estimates.

Simply put, this pullback is a terrific opportunity for long-term investors to buy one of the most dominant companies in the world at a fantastic price. 

Disney Has Already Demonstrated Impressive Rebound Skills
After bottoming out during the recession, Disney's financial rebound has been quite impressive. As you can see in the chart below, earnings have grown at a 19% annual pace over the past five years. Take a look:

And although Disney is most famous for its movies and theme parks, the division that has the biggest overall impact on the company’s performance is the media networks division, which in 2014 contributed over 56% of the Disney’s operating income.

Disney's post-earnings swoon has largely been attributed to comments made by C.E.O. Bob Iger on the company's conference call regarding the media networks division and cable channel ESPN. Although the sports network is still available in more than 80% of American households, there have been some subscriber losses, due to cable customers choosing cheaper viewing packages that do not include ESPN. That news led investors and analysts to hit the panic button.

Is such fear about ESPN's future warranted? Mr. Iger noted that most of the channel's live sports deals run into the next decade and that 96% of all sports programming is watched live. Even if the pace of cord-cutting accelerates, Disney has the ability to offer ESPN directly to consumers in new and innovative ways. In short, sentiment regarding the media networks division has become too pessimistic.

The media networks division is still growing revenues in the mid-single digits, and its media properties still garner huge subscription numbers, which create a hefty amount of cash for the parent company.

Disney Stands Alone In The Entertainment Industry
Warren Buffett once said, "The single most important decision in evaluating a business is pricing power." And with brands and franchises like Marvel Comics, Star Wars, Pixar, the Disney Animation classics and others, Disney has enormous brand cachet. Other entertainment firms, such as DreamWorks Animation (Nasdaq: DWA) and News Corp. (Nasdaq: NWS) have tried to replicate the success of Disney's entertainment franchises, but without the same degree of success. That means that Disney has "no substitute" pricing power as much as any business in the world. Although pricing power cannot be measured in a snapshot, it manifests itself over years and decades of outperformance.

After the recent pullback, shares now trade for around 20 times projected fiscal (September) 2015 earnings per share of $5. This is a bargain for a company of the caliber and tremendous earnings growth of Disney. Notably, profits are expected to grow at least 10% in fiscal 2016 as well.

Risks to Consider: Besides cord-cutting, Disney is spending a lot of money on huge projects that could be big winners or big drags on earnings. Both the Shanghai Disney theme park and a new film in the Star Wars franchise are due to completed in the next year.

Action To Take: Despite the potential for short-term volatility, Disney remains a stock to buy and own forever.

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Chris Walczak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.