Shares of Walt Disney (DIS 0.18%) popped 4% on Tuesday, February 3, after the company crushed Wall Street earnings estimates. For its first quarter, Disney's adjusted earnings grew 22% year over year to $1.27 per share as revenue rose 9% to $13.39 billion. Analysts polled by Thomson Reuters had expected Disney to earn $1.07 per share on revenue of $12.87 billion.
Source: Flickr, Josh Hallett.
Disney's shares have climbed more than 30% over the past 12 months, easily outperforming the S&P 500's 15% gain. Therefore, investors might wonder whether the stock is worth buying at all-time highs near $100. Let's look at Disney's strengths, weaknesses, and valuation to get a clearer picture of where this stock could head in 2015.
Top-line breakdown
During the quarter, Disney posted strong top-line growth across three of its five main business segments -- media networks, parks and resorts, and consumer products -- which respectively posted 11%, 9%, and 22% year-over-year growth.
Source: Compiled by author from Disney's 1Q earnings.
At media networks, Disney's cable and broadcasting networks both reported 11% year-over-year revenue growth, allaying concerns regarding rising competition for ESPN and stagnant growth at ABC. Attendance at Disney's theme parks wasn't affected by the widely publicized measles outbreak believed to have started at Disneyland in California, while strong demand for Frozen and Marvel merchandise fueled sales growth at its consumer products business.
Quarterly revenue at Disney's two other segments -- studio entertainment and interactive -- respectively declined by 2% and 5% year over year. The studio entertainment segment's decline wasn't surprising, since Frozen -- the highest-grossing animated film in history -- was released in the prior-year quarter.
The interactive division's decline was attributed to lower sales of Infinity accessories and catalog titles, which was surprising since research company NPD Group previously reported Infinity sales rose 16% year-over-year during the November-December holiday season. However, rising sales of Infinity starter packs partially offset that decline, which suggests newer players might buy more accessories in the future.
Bottom-line breakdown
Meanwhile, Disney's operating income rose at all five segments.
Source: Compiled by author from Disney's 1Q earnings.
Operating income at media networks rose 2% year over year, with 35% growth in the broadcasting business offsetting a 2% decline in cable, which was attributed to higher marketing costs and lower advertising revenue at ESPN. Operating income at Disney's parks and resorts rose 20%, thanks to higher traffic and guest spending at parks, although a stronger dollar reduced income from international resorts.
Disney's studio entertainment business posted 33% bottom-line growth, thanks to strong demand for home releases of Frozen, Maleficent, and Guardians of the Galaxy. However, that growth was slightly offset by the weaker theatrical performance of Big Hero 6 versus Frozen in the prior-year quarter.
Operating income at Disney's consumer products and interactive divisions respectively climbed 46% and 36%. The disparity between revenue and income growth at the interactive division was due to the strong performance of high-margin mobile games such as Tsum Tsum and Frozen Free Fall.
Disney's valuation and growth potential
Over the past two years, Disney stock has traded with a trailing P/E between 17 and 23. On average, analysts expect Disney to earn $4.67 per share in fiscal 2015 and $5.42 in 2016. Based on a midpoint P/E of 20, we can estimate Disney's "fair" median price target might be $93 in 2015 and $108 in 2016. That admittedly makes Disney stock look a bit pricey at about $100, considering that its P/E currently hovers at a nine-year high.
Source: YCharts.
But as a long-term investor, I have no plans to sell Disney when it hits $100. Looking ahead, I believe the studio entertainment business will post big returns for years thanks to new Marvel, Star Wars, and Pixar films.
Short-term investors need not apply
As I mentioned in a previous article, CEO Bob Iger excels at maximizing the profitability of top franchises by straddling them across TV shows, films, theme parks, games, and toys -- a key strength that rivals Fox (FOX), Time Warner (TWX), and Sony (SONY 1.10%) notably lack. Disney recently delayed the grand opening of Shanghai Disney Resort to 2016, but when it finally opens, it could serve as a lucrative launchpad for the company to open even more parks across China.
If you're looking for a short-term profit, Disney probably doesn't have much imminent upside potential. But long-term investors -- who can patiently wait for Disney's multiyear growth plans to be fully realized -- will be well rewarded in the long run.
