Disney

  • 13 Jun
    FOX: who wins a bidding war?

    FOX: who wins a bidding war?

    One of the biggest stories that had tongues wagging this morning as the stock market opened was a federal ruling late yesterday rejecting an anti-trust appeal by the government to block AT&T’s (T)pending merger with Time Warner Inc. (TWX). Not only did that clear the way for that deal to close sooner than later, it also seemingly could act as a blueprint for a number of other deals going forward. Perhaps the next biggest deal analysts are paying attention to is the Walt Disney Company’s (DIS) proposed acquisition of assets from Twentieth-Century Fox Inc. (FOX). Comcast Corporation (CMCSA) has long been waiting in the background to jump into the fray in competing for those FOX assets, and the AT&T/Time Warner ruling appears to have been one of the last things the company was waiting on to submit their own competing bid.

    A bidding war between DIS and CMSCA could get expensive. When the deal was first announced in December of 2017, it was valued at around $52.4 billion. Without giving away specific numbers or other details, officials at Comcast said that any competing bid for FOX assets would be all cash, and which some analysts suggest could be valued around $60 billion. FOX has set a meeting for July 10 for shareholders to vote on the proposed DIS deal, which differs from the expected Comcast bid not only in value, but also as a mix of cash and DIS shares.



    Who will win? DIS was first to the table, and certainly would seem to have the inside track. The assets they would acquire would fold naturally into multiple existing segments of their business. European sports network Sky, for example gives DIS an way to expand their ESPN sports programming on an international scale they’ve been seeking for some time. The deal also would give them controlling interest in streaming service Hulu, which could simplify the plan they initiated last year to launch their own streaming service to compete with Netflix (NFLX). FOX also controls the rights to Marvel properties like the X-Men franchise, so this acquisition would bring those assets back home.

    Don’t underestimate CMCSA’s potential or desire to buy those assets as well. Comcast is the parent company of NBC, Universal Pictures, Telemundo (Latin American broadcasting, including sports programming), Universal Pictures, and DreamWorks Animation, to name just a few of their business segments. They seem to clearly recognize the need to add even more content and distribution capability, since a deal with FOX could include useful properties like National Geographic, FX Networks and the movie studio. And don’t underestimate the impact of Hulu, since whoever gets control of that service finds a strong foothold versus Netflix and Amazon Prime.

    Looking at a few of the fundamental and value-based elements of DIS and CMCSA could provide some clues about which company could be a stronger position right now. Let’s dive in.



    Fundamental and Value Profile – DIS

    The Walt Disney Company is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The media networks segment includes cable and broadcast television networks, television production and distribution operations, domestic television stations, and radio networks and stations. Under the Parks and Resorts segment, the Company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The studio entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. It also develops and publishes games, primarily for mobile platforms, books, magazines and comic books. The Company distributes merchandise directly through retail, online and wholesale businesses. Its cable networks consist of ESPN, the Disney Channels and Freeform. DIS has a current market cap of $156.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 22%, while sales grew a little over 9%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
    • Free Cash Flow: Free Cash Flow is healthy, at more than $10.6 billion over the past twelve months. Free Cash Flow has been growing steadily, with only occasional, one-quarter dips since 2013.
    • Debt to Equity: the company’s debt to equity ratio is .39, which is a low number. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with healthy cash reserves as well. Total cash and liquid assets are approximately 22% of the company’s total long-term debt. Keep in mind that debt would likely increase if a deal with FOX is completed, but to what extent remains to be seen. The company’s relatively modest debt levels suggests they have room to work with in structuring an attractive cash-and-stock deal, and to engage in a bidding war, as all indications are that DIS will be aggressive in pursuing shareholder’s votes in their favor.
    • Dividend: DIS pays an annual dividend of $1.68 per share, which translates to an annual yield of 1.62% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DIS is $32.35 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.19. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Media industry’s average is 4.6, so DIS’ Price/Book ratio is almost 50% below the industry average and bolsters my argument the stock is being overlooked versus its counterparts right now, despite the buzz surrounding the FOX deal.



    Fundamental and Value Profile – CMCSA

    Comcast Corporation is a media and technology company. The Company has two primary businesses: Comcast Cable and NBCUniversal. Its Comcast Cable business operates in the Cable Communications segment. Its NBCUniversal business operates in four business segments: Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Its Cable Communications segment consists of the operations of Comcast Cable, which provides video, high-speed Internet and voice services to residential customers under the XFINITY brand. Its Cable Networks segment consists of a portfolio of national cable networks. Its Broadcast Television segment operates the NBC and Telemundo broadcast networks. Its Filmed Entertainment segment primarily produces, acquires, markets and distributes filmed entertainment across the world, and it also develops, produces and licenses live stage plays. Its Theme Parks segment consists primarily of its Universal theme parks in Orlando, Florida and Hollywood, California. CMCSA has a current market cap of $150.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 17%, while sales grew a little over 11%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
    • Free Cash Flow: Free Cash Flow is healthy, at more than $11.4 billion over the past twelve months. Free Cash Flow has declined modestly since the third quarter of last year, but has increased about 25% since September 2016.
    • Debt to Equity: the company’s debt to equity ratio is .90, which is generally manageable. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with adequate cash reserves as well. Total cash and liquid assets are approximately 9.5% of the company’s total long-term debt. Comcast has indicated that any bid for FOX assets would be all cash, and since analysts are predicting that could be as high as $60 billion, the company would certainly have to raise debt to do it. Considering that their total long-term debt right now is more than $63 billion, a successful bid would make CMCSA the most highly leveraged company in the industry.
    • Dividend: CMCSA pays an annual dividend of $.76 per share, which translates to an annual yield of 2.35% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CMCSA is $15.22 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.12. I usually like to see this ratio closer to 1, or even better, below that level, but industry-based averages above 1 aren’t uncommon. CMCSA’s Price/Book ratio is only slightly below the Media industry’s average of 2.2, but it is also below its historical average of 2.7, suggesting the stock is discounted right now by about 21%.


    By Thomas Moore Disney Investiv Daily M&A
  • 08 Jun
    Is DIS undervalued? I think so

    Is DIS undervalued? I think so

    We’re moving fully into summer, and that means kids are home from school and families are planning vacations. Growing up as a kid, and then again as a parent, it seemed like Walt Disney theme parks always found their way into my family’s vacation plans. More →

  • 04 May
    Here’s Why You Should Take A Look At Disney (NYSE: DIS)

    Here’s Why You Should Take A Look At Disney (NYSE: DIS)

    • We all know about Disney, but is it a good investment? I’ll explain how to approach investing in the company.
    • I’ll first describe the company and touch on the Fox acquisition.
    • DIS is a great example of what Amazon or Netflix once were.



    Introduction

    The Walt Disney Company (NYSE: DIS) is an intriguing stock. It boasts a PE ratio of just 14.19, a dividend yield of 1.69%, it has a strong brand, and the stock hasn’t gone anywhere in the past 3 years.

    Figure 1: DIS in the past 3 years. Source: CNN Money.

    Let’s see whether the 3 year underperformance is due to some structural issues or if it’s a great opportunity to buy a wonderful business at a fair price, the kind of business you want to hold forever.

    Before getting started, let me just mention that DIS was one of Buffett’s biggest mistakes. Buffett invested in DIS in 1966 when the company was valued at just $80 million when he knew that it cost more just to build a few themes in the park, and pre-tax profits were $21 million. He invested $5 million and sold a year later for a 20% profit. The mistake comes from the fact that the $5 million invested back than would now be worth more than $5 billion not counting the dividends over time. So, even Buffett has made the mistake of selling great brands bought on the cheap.

    Let’s see if DIS will do the same for current investors over the next 50 years.

    Disney – The Company

    I always like companies that have multiple separate segments because that always makes it tough to analyze for others and thus creates opportunities especially if there are segments that might explode in the future. We all know that Wall Street focuses on the next few quarters and not so much on the future and value.

    Disney’s segments are Media, Parks, Studio Entertainment, and Consumer Products with Interactive media. The media network makes the most revenue, but the parks are the most profitable.

    Figure 2: DIS’s 2018 full year results. Source: DIS.



    So, if you were wondering why DIS’s stock has underperformed lately, above lies the answer. Revenue declined 1% and profits declined 6% year-over-year. The situation improved in the last quarter as revenue increased 4% and operating profit 1%, and we will see this coming Tuesday whether the trend will continue as DIS reports earnings.

    However, let’s look critically at what is there. The Media segment with ESPN is in a tough spot as the media business is changing altogether. Parks and resorts are good businesses but cyclical in nature, so one has to keep that in mind. Studio revenues depend mostly on Star Wars and other releases, while consumer products are also flat. But the key lies in the unseen as whatever can be properly estimated is baked into the price already.

    We have to ask ourselves whether DIS’s direct to consumer products in combination with the FOX acquisition will lead to some growth in the future or not.

    DIS will acquire 21st Century Fox’s film and television studios, its cable entertainment networks, and international TV businesses. This will give it enough firepower to battle Netflix and Amazon. Further, the $52 billion acquisition is an all stock acquisition that doesn’t leverage the company but does dilute shareholders. Nevertheless, you never know what will come out of this in the long term, but I think it does have potential as there must be more service providers out there and DIS is a familiar name. DIS will also spend $20 billion on buybacks to lower the dilution hit.

    The acquisition has been done at 11 times EBITDA which isn’t high in this market, and the expected savings of $2 billion should improve the acquisition metrics.

    The key is that DIS now has a much bigger reach and can really push its direct to consumer business ahead and drive into the next 100 years.

    Figure 3: DIS’s acquisition plan. Source: DIS.



    What Kind Of An Investment Is Disney?

    Now, you look at DIS and you see the famous brands, global parks, and resorts that attract many visitors, and movies that bring people to cinemas, but the stock price isn’t going anywhere and the valuation looks cheap.

    There are two things that can happen. DIS can continue to see its Media empire shrink, the Fox acquisition might not work out as planned and just dilute earnings which wouldn’t be a good thing at these already low valuations.

    The second scenario is one where DIS becomes a competing powerhouse with Netflix and Amazon on direct to customer services and get a far higher valuation, especially when the business becomes profitable. Given the stability of the other parts of the business, and their cash flows, DIS might be in a much better position to actually scale its content and monetize it. DIS’s current market cap is $150 billion, but if there will be big growth coming from streaming services, I wouldn’t be surprised to see the stock double on improved earnings, growth, and valuations. If there comes more hype, you can also see it triple in the next few years.

    So, the upside potential over the next few years is huge and the downside isn’t that big. Let’s say that if the streaming business struggles and there is a recession, what you can expect is to see the stock drop 50% when I’m sure there will be others (read, Buffett) waiting to buy the company altogether.

    The key component when investing in DIS is psychological. Can you invest in the unknown and if it doesn’t work out, fine, while you’ll win the lottery if it does? The problem is that nobody knows how long one will have to wait and that’s something difficult to sell to Wall Street. Buy and forget investors should really take a look at DIS now.



    By Sven Carlin Disney Investiv Daily
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