Shares of The Walt Disney Co. (DIS 0.16%) have fallen roughly 20% since the Aug. 4 release of its Q3 earnings. Even though the company reported record profit, with EPS up 15% year over year, investors took one look at Disney's slowing profit growth within its media networks segment, Disney's largest segment, which makes up half of its total revenue, and started worrying about Disney's ability to continue growing in a changing media landscape.
The issues within the media networks segment and getting customers to subscribe to services such as ESPN as they increasingly opt for "cutting the cable cord" in favor of streaming services has affected nearly all media companies, not just Disney. However, Disney continues to have many areas of growth outside media networks that make it especially appealing as a long-term play.
Highlights driving Disney's growth
- Theme-park expansion. Theme parks and resorts is Disney's second-largest segment and makes up about one-third of Disney's total revenue. However it's been one of the best-performing segments in the past few years, with Q3 operating income up 19% year over year. With new expansion around the world planned for the next few years, this could end up being Disney's largest segment.
The most exciting developments in the Theme Parks segment include an expansion of Disneyland in Anaheim, a possible doubling in size of Disneyland Hong Kong, new attractions such as Star Wars lands, and, most importantly, Disney Resort Shanghai, which is expected to open in early 2016 and be the most visited theme park in the world in its first full year open.
Star Wars VII: The Force Awakens. Graphic source: Disney.
- Star Wars. Disney acquired Lucasfilm in 2012 for just over $4 billion, giving Star Wars fans and Disney investors both reason to be excited for the next installment of this saga. Star Wars VII: The Force Awakens, which is slated to come out in December, is expected to become one of the highest-grossing films of all time.
Even if this Star Wars movie doesn't surpass Avatar's incredible $2.7 billion worldwide box-office haul, it will almost certainly be the biggest movie of the year and become one of the highest-grossing movies ever.
But other than its box-office success, Star Wars will also become an increasingly large part of Disney's future success, with new attractions at its theme parks, a new line of consumer-products materials, TV shows, licensed characters, and more.
- New movies. Other than the coming movies people are already buzzing about -- like the slate of new Marvel movies, Star Wars VII, the new Pirates of the Caribbean movie planned for 2017, and all of the other great movies already on the Disney timeline for the rest of this year -- the company just announced another set of movies to add to their lineup.
New films announced at Disney's D23 expo in August include Toy Story 4; an animated version of the "Jack and the Beanstalk" story called Gigantic, which has the same song writers as Frozen (as well as the musicals Book of Mormon and Avenue Q); an animated musical about a Pacific Islander princess called Moana; a new Pixar movie called Coco, about the Dia de los Muertos holiday; and more. The next couple of years should be even more successful than years past as Disney increases the number of films it produces each year under many different genres.
"Playmation" lets the user live the story. Source: Disney
- Consumer products. One of the most interesting parts of Disney's earnings release is how quickly its consumer products division is growing, as the success of its movies and the characters in them promote more merchandise sales and licensing than ever. During the recent quarter, the consumer products segment raised operating income an incredible 27% year over year.
While Frozen products have led the way over much of the past two years, all of Disney's other franchises -- including Star Wars, Marvel, and the many Pixar and animated feature films -- will continue to lead the way for this segment in the future. Also, Disney announced during this quarter that it's working on what could be its biggest new consumer-products development: the "Playmation" line of toys and gadgets that allow users to experience the characters and stories with near-virtual-reality technology, such as interactive toys and wearables.
- Increasing return on equity. While the preceding points show how exciting Disney's new theme-park developments, movies, and toys will be, here's a point showing Disney's increasing income efficiency as well: For each dollar of shareholder equity, Disney has nearly doubled its profitability in the past five years.
DIS Return on Equity (TTM) data by YCharts
Disney looks stronger than ever
While media networks income erosion is definitely a threat to Disney's short-term growth, as this segment makes up about half of Disney's total revenue, the growth throughout the rest of the company in theme parks, movies, and consumer products is testament to how strong the total business is. Furthermore, the company's growing ROE is a good indicator of management's ability to continue increasing shareholder value. In all, Disney continues to look like an attractive long-term investment, especially at these lowered prices following the recent sell-off.
