If your portfolio needs some growth and income, what better way to get it than by adding some mouse power? Walt Disney (DIS -1.01%) is a company that is extremely well known, but the company should provide strong returns for investors over the next several years. Though the stock is up roughly 40% in the last 12 months, this should be just the start of a multi-year growth cycle for the company.
Well known and under appreciated
The first reason to mouse power your portfolio is while Disney's Parks & Resorts business is probably the company's most well-known business, it might also be the most under appreciated. In fact, you could argue that one of Disney's greatest strengths is the company's reliance on this business.
Compared to Disney's competitors like Comcast's (CMCSA -5.82%) NBC Universal business, or Time Warner (TWX), Disney gets significantly more revenue from its parks than its peers.
In the current quarter, Disney generated 32% of its revenue from Parks & Resorts. By comparison, Comcast got just 4% of its revenue from parks, and Time Warner's Warner Bros. Movie World is but a footnote in the company's business.
The reason this distinction is so important is, Disney's parks business grew revenue by 8% on a year-over-year basis. The company has reported for the last several quarters that the parks business grew because of increased guest attendance and spending. Comcast also reported strength in its parks business, and the recovery in the economy should continue to drive positive results in the near term.
A lineup few can match
The second reason to choose Disney is the company's studio division. Though Disney's Studio Entertainment business represented only 13% of the company's revenue stream, a strong movie lineup also benefits the company's Consumer Products business as well.
If you are looking for a strong movie release schedule, investors need to look away from Comcast at least in 2014. Arguably the company's strongest release this year could be Dumb and Dumber To. However, given that NBCUniversal had the benefit of Despicable Me 2 last year, comparisons will be difficult.
Time Warner's Warner Bros. division has three very strong movies coming out in Godzilla, 300: Rise of an Empire, and The Hobbit: There and Back Again. However, with tough comparisons to The Hobbit: The Desolation of Smaug, Man of Steel, The Hangover III, and others, huge growth from Time Warner would be a surprise.
Disney, on the other hand, has huge releases coming out in 2014 that should provide growth. Between Disney and Marvel, movies like National Treasure 3, Muppets: Most Wanted, Planes: Fire & Rescue, Captain America: Winter Soldier, and Guardians of the Galaxy, are all due out in 2014. Since currently 13% of Disney's revenue is from Studio Entertainment and nearly 9% more comes from Consumer Products, these strong movies should drive not only good film results, but also strong sales from products connected to these films.
This is no surprise
Given the strength of the company's Parks & Resorts, Studio Entertainment, and Consumer Products, it should come as no surprise that Disney also sports strong free cash flow. Disney's strong free cash flow is the third reason to choose the stock. Among its peers, only Comcast generated more core free cash flow (net income + depreciation-capital expenditures) in the last nine months than its peers.
In the last nine months, Comcast generated over $6 billion in core free cash flow, while it took Disney 12 months to achieve this same result. By comparison, Time Warner generated just over $3 billion in the last nine months.
While Disney generates a yield of just over 1%, the company's free cash flow payout is just under 22%. It's true that Comcast and Time Warner pay higher yields and have similar payout ratios, but Disney's brand catalog seems more impressive.
With businesses like Pixar, Lucas Films, Marvel, and Disney all under the same roof, it's difficult for any competitor to match the reach and breadth of Disney's businesses. Investors looking for strong returns should follow the power of the mouse.
