• Saahil Menon

Talking Stocks: The Walt Disney Co.

How strongly will the worldwide effects of COVID impact Disney?

Despite being an established blue-chip business, Disney seems to be heading for the rocks amid the rippling of COVID-19.

With theme parks closed and sudden halts in production, it's plausible to assume that revenue and bottom-line profits are unlikely to appease investors this year.

Usually, the frozen cash inflows and deteriorating business operations would scream bankruptcy…but with Disney holding over $5 billion cash-on-hand as well as $193 billion in total assets – can we really expect much harm to the company?

Consider our stance on the near-term value of Disney below.

1. The Entertainment industry – here to stay.

Given recent estimates, the global entertainment and media industry is on track to be worth $2.6 trillion by 2023. Although this figure is desirable, it represents a compounded growth of just under 5% each year: clearly showing signs of stagnation.

Figure 1: Forecasted Growth of Entertainment Industry

Source: (Statista, 2020)

This would usually be a concerning trend, except for the fact that entertainment isn’t going anywhere – it’s revenues may not be growing as much as other industries but it has the unique selling point of perpetuity: it will always be there.

Assuming Disney remains a market leader, the aforementioned point gives the stock a sense of long-term reliability, which is advantageous for beginner investors aiming to reduce risk.

2. Fundamental Perspective

In terms of fundamentals, the most basic analysis comes down to 3 key aspects: profitability, cash flow, and value.

a) What separates Disney from most competitors is its profitability consistency, as shown below:

Figure 2: Disney Revenue vs Earnings Growth (2014 – present)

Source: (Simply Wall Street, 2020)

A concurring level of growth year-over-year, with profit margins sticking around the 13-23% region throughout: clearly an attractive standpoint for investors who are looking for more stable returns.

b) Cash Flows: As mentioned previously, Disney is sitting on over $5 billion in cash, giving them the financial prowess to satisfy any short-term liabilities and also fund emergency ventures. Even more so, their strong credit rating of "A" will allow them to expedite the process of borrowing funds: a likely course of action given the record low-interest rates currently being experienced.

Thus, we have a business that not only has a sufficient cash hoard, but also sustains the ability to borrow at their behest: both of which will keep them afloat during the meltdown caused by COVID-19.

c) Value: One of the few positives to come out of this pandemic is that stocks are now trading at large discounts to their fair value, and Disney is no different:

Figure 3: Disney’s Stock Price Valuation

Source: (Simply Wall Street, 2020)

The figure above depicts that Disney’s stock price should fundamentally be around $140 per share, which means that investors can realize a 33% potential gain from buying shares now.

Key Point: Opening a position on Disney may be more favorable than other blue-chip companies as the concern about their theme park closures caused investors to panic-sell, which resulted in a more significant fall for Disney compared to its other blue-chip companions.

This means that beginner investors can pick up Disney stock at a relatively lower price and benefit from a higher return in comparison to buying Microsoft, Google or Facebook - as the latter 3 businesses did not suffer stock price falls of the same magnitude.

3. Investor Signals

Lastly, it may be beneficial to take signals from the world’s most successful investment managers: Vanguard and BlackRock. Both the aforementioned companies have over $6 Trillion in assets under management: indicating their reliability in terms of both analysis and investment decisions.

Coincidently, they are the two largest shareholders of Disney, owning 7.43% and 6.22% of the company, respectively.

Figure 4: Excerpt from Disney Ownership

Source: (Simply Wall Street, 2020)

It is understandable that a) these investors may not always be right and b) they can easily afford to be wrong,– but given our analysis in Points 1 and 2, the merits of owning Disney stock seem to outweigh the minor concerns, and this is why beginners can rely on investing in Disney stock today.