Why investors see Disney, and its consistent great performance, as stock "magic"

10 min read

12 May 2015

Since Oscar season in February 2014, movie and entertainment stocks have been outperforming and continuing to advance. In the first days of May 2015, however, the tide has turned with every stock in the sector except for Disney posting a loss.

Over the last 25 years, movie stocks have had their ups and downs depending on the time of the year. Historically the sector has gotten the year off to a strong start building on the momentum around Oscar season. But all of the hype that drives stocks higher ahead of big events has tended to unwind once the big films actually get released.

After getting off to a rough start in January 2015, movie stocks rebounded strongly between February and April, with CMC chief market strategist Colin Ciezynski suggesting “the sector outperfored the Dow in all three months”. 

Despite the sector being hit hard in May, Disney has consistently been the strongest performer and has yielded positive returns in all months so far. 

Nomura analyst Anthony DiClement suggested that if he had to invest in entertainment stock, he would pick either Walt Disney or 21st Century Fox given their “robust portfolio” of sports rights and content that protects them from the evolving media landscape. 

DiClemente emphasised that Disney had “visibility of ESPN affiliate fee growth”. He also cited the company’s “wise” approach to digital distribution, and the theme parks ability to drive studio and consumer products results, as well as financial flexibility for shareholder returns, among the reasons for his love of Disney stock.

“Although studio results face a tough comparison in 2015 from the success of Frozen, we believe this is fully reflected in street models,” he said. “Furthermore, Disney’s calendar 2015 studio film slate includes two Pixar films, two Marvel films and the new Star Wars film that can more than offset the difficult compare on a full-year basis and possibly surprise to the upside.”

According to DiClemente, the company is only beginning to reap the rewards of its investments in the cable networks and is now best-positioned for international growth.

One of the biggest questions currently facing movie stocks is whether Disney can maintain this momentum.

Disney has an impressive track record of earnings results since 2011, but while this is an amazing reflection on financial strength, it also means the bar is being raised for Disney. It’s also because the company trades for 22 times earnings estimates in the fiscal year. This makes its stock one of the most expensive compared to other media companies.

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Indeed, it has been a challenging period for the company, since it faced remarkably tough year-over-year comparisons due to the massive success of Frozen.

The company has been unable to keep up with the $1.28 share it earned a year earlier when Frozen was still in theatres, but the $1.23 it did post was still better than the $1.10 that had expected. However, Disney stock is now trading at a record high. It’s up 36 per cent in the past year, which is more than double the gains of the US stock market overall.

Disney revenues increased by seven per cent to $12.46bn in comparison to the $12.25bn analysts were looking for. Furthermore, the revenue for its parks and resorts increased by six per cent.

“Our second quarter performance, marked by increased revenue, net income and EPS of $1.23, demonstrates the incredible ability of our strong brands and quality content to drive results,” said Disney CEO Robert Iger. 

He has every right to describe as an incredible brand given since Iger took over from Michael Eisner in October 2005, shares have soared nearly 420 per cent. The acquisitions of Pixar, Marvel and Lucasfilm all occurred under his watch as well.

Among Iger’s arsenal skills is knowing who to partner with. It was said that Apple’s Steve Jobs was the chairman of Pixar and majority shareholder at the time. He was not a big fan of Eisner – and the feeling was mutual. Disney was at risk of losing the distribution rights to Pixar films because of it.

When Iger became CEO he remedied the problem. Due to this, Disney’s popular ABC and Disney Channel shows were made available on iTunes. Not to mention the fact that Disney bought Pixar soon after.

Read on to learn about Disney’s intellectual property portfolio, leveraging our nostalgia and more nuggets on what makes the company so appealing to investors.

One of the things Disney uses to its advantage is the power of the franchise.

As previously mentioned, due to the relationship between Pixar and Disney, the latter exclusively owns the rights to characters including Nemo’s Dory and Nemo, Toy Story’s Buzz Lightyear and Wood, as well as Cars’ Lightning McQueen. It is also the reason why Toy Story now has its fourth movie in the making, with Cars planning to get a third “instalment” and a Finding Dory planned for release.

There’s also Lucasfilm and the never-ending Star Wars episodes. Luke, Han Solo and Leia are all on Disney’s “exclusive to use” list. And let’s not get started on Marvel. The churning series of comic-based movies has only just begun. 

The company even managed to persuade Sony to let it “borrow” Spiderman.

Undoubtedly, Disney’s stock “magic” increased with the release of Avengers: Age of Ultron, which opened to the second largest US opening in box office history at $191.3m. Although it may have been a lower figure than previous Hollywood projections, the movie raked in $631.1m in under two weeks.

Age of Ultron has opened at number one in every market where it has been released, and it has already brought in over $650m.

Iger said: “The excitement around this movie is unlike anything we’ve ever seen before.”

Shares of the House of Mickey Mouse are also up by 40 per cent, trading at $110 per share. This figure isn’t too far off their all-time high.

It’s time for adults and investors to admit that Disney is, for all intensive purposes, still as magical as the time they themselves were plonked in front of the screen. The company has consolidated a strong emotional bond with consumers spanning different generations. This is what makes the company so unique, that and it’s incredible portfolio of intellectual properties.

Plans also involve opening a Shanghai Disney Resort in 2016. Covering 963 acres, the resort has been hailed as one of Disney’s biggest projects, and could hail some great growth opportunities.

Then there’s Cinderella.

It’s amazing that a remake could gross over $70m in one weekend.

This is also one of the many ways in which Disney manages to maintain profit – by leveraging old and nostalgic movies. Remember the mentioned emotional bond? Insert it here as well.

The studio has decided to wade through its extensive animated library and start remaking some of the classic tales, as was seen with the recent release of Maleficent. There are also plans to create liver versions of Beauty and the Beast and Dumbo.

The only thing that could now possibly do damage to Disney, or its stock performance, is Iger’s retirement.

Iger’s has expanded Disney’s global reach, and the stock has soared from $20 a share in 2010 to $86. A company statement claimed that shareholder return increased 311 per cent since Iger became CEO in 2005.

He is expected to retire when his contract runs out in 2018. However, a succession plan has been confirmed, with Tom Staggs, who was the head of the parks business and was and CFO prior to that, set to take his place.