"Walt Disney (NYSE:DIS) is the happiest place on Earth."
You have probably heard or seen this phrase in Disney's advertisements or when you visited its theme parks. Walt Disney's vast universe of characters resonates with everyone that comes in contact with them. However, investing legend Peter Lynch once said, "Investing without research is like playing stud poker and never looking at the cards."
With that said, let's take a look at the strengths and fundamentals of this entertainment giant to see if it's growing its revenue, net income, and free cash flow--the life blood of any business and the catalyst for superior capital gains and dividend increases. It's also important to check to see if the company is retaining some of that cash for reinvestment back into the business.
Walt Disney enjoys a great deal of brand strength. The company ranked No. 14 on Interbrand's 2013 Best Global Brands and No. 23 on Brand Z's 2014 list of 100 Most Valuable Global Brands. Moreover, the company owns or partially owns a multitude of other powerful brands like Pixar, Marvel , ESPN, A&E, and Lucasfilm.
Recent successes include Pixar's iconic blockbusters such as Monster University which grossed nearly $269 million over its lifetime according to Box Office Mojo. Marvel, another Walt Disney subsidiary, produces blockbuster movies such as Iron Man 3 which clocked in a lifetime gross to date of $409 million. Moving into another entertainment arena, sports, ESPN which is 80% owned by the company, also does well contributing to the 6% gain in year to date cable network revenue. Walt Disney also owns 50% of A&E which broadcasts popular shows like Duck Dynasty .
Walt Disney's Lucasfilm owns iconic brands such as Star Wars and Indiana Jones. High expectations haunt Lucasfilm. It plans on releasing Star Wars Episode VII in 2015 which represents one of the most highly anticipated films of the decade.
Walt Disney operates in five major segments: media networks, parks and resorts, studio entertainment, consumer products, and interactive. Walt Disney can take big blockbuster names and parlay them into theme parks, television shows, cruise line themes, toys, and video games giving it multiple opportunities to market each and every one of its brands.
Of course, all of this brand strength and multiple sources of income resulted in strong fundamentals for the company. Over the past 10 years Walt Disney grew its revenue, net income, and free cash flow 47%, 162%, and 107% respectively.
More recently, Walt Disney grew its year to date revenue, net income, and free cash flow 9%, 30%, and 8%, respectively. Huge across the board gains contributed to these numbers most notably the studio entertainment segment which saw significant gains due to the movies Frozen and Thor: The Dark World.
Walt Disney sits on an ok balance sheet with cash and long-term debt to equity clocking in at 9% and 23%, respectively. The cash ratio resides a little in the low range. However, the low long-term debt to equity balance represents a good thing because interest on long-term debt can choke out profitability and cash flow over the long-term. Investors should look for companies with long-term debt to equity balances of 50% or less.
Walt Disney also pays a small dividend. It's best to gauge dividend sustainability by looking to see how much of company's free cash flow gets paid out in dividends in a full year. Like long-term debt to equity ratios, a good rule of safety resides at 50% or less.
In 2013, Walt Disney paid out a frugal 19% of its free cash flow in dividends. Currently, the company pays its shareholders $0.86 per share per year translating into a yield of 1%.
What should you do?
Current investors should hold tight to their shares of this company and may want to buy more. Disney's brand strength and reputation as a provider of an entertaining experience should serve as the catalysts for more fundamental growth. Despite the company's strengths it trades at a reasonable P/E ratio of 21 versus 19 for the S&P 500 as a whole making it slightly overvalued but worth it for a company of this quality.
William Bias owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of 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.