A stock that has outperformed the industry so far in 2020. Does it still offer a good potential return to the upside?

Company background

The Walt Disney Company is a diversified international family entertainment and media enterprise. It operates through a few different segments: Media Networks, Parks, Experiences and Products, Studio Entertainment and Direct-to-Consumer and International (DTCI). Founded back in 1923 by Walt and Roy Disney, the company has got almost 100 years of history in producing quality content and making families and children happy all around the globe. Walt Disney’s products include: television, publishing, films, music, video games, amusement parks, broadcasting, and radio and web portals. The company has become a global leader in the sector it operates and that has been reflecting on its share price performance especially in the past few years. The stock had been up 50% since the end of 2016 until early 2020 and there has been a clear uptrend going on the stock during that period of time. Yet, 2019 has definitely been the best year for Disney so far with the stock rising 35%, beating the market’s benchmark S&P 500 and its 28% gain during that period of time.

The market was in a very strong bullish rally throughout 2019, but that is not the only reason as to why the company managed to deliver such strong financial results and the stock price has spiked up so much. There has been a new major factor for Disney’s growth – the company’s new service – Disney+ (Disney Plus). Now, let’s have a look at the numbers.

Disney’s financial performance

Walt Disney delivered strong financial results in the past few years, which has been leading to more buying interest among investors and traders and that has been driving the stock price higher.

The December 2019 ending quarter’s results were very strong and the company showed an increase in both revenue and profitability, driven by top-line growth across all of their segments, most particularly the Studio Entertainment and Direct-to-Consumer (DTC) businesses. In fact, the company has seen a great success on its recent movies Frozen II and Star Wars: The Rise of Skywalker, which boosted Studio Entertainment’s revenues. Actually, The Rise of Skywalker coming out in December 2019 had a great global debut with $198.8 million in sales, making it the No.1 western film in nearly all markets out there.

Furthermore, Disney+ attracted its users immediately and helped the company gain a solid user base within a very short period of time based on its strong content portfolio and a cheaper bundle offering.

In fact, the company’s financial statements had been showing a continuous improvement over the past 5 years since 2015. The sales had been growing steadily around 6-7% a year between 2015 and 2019, followed by a significant increase of 15% in 2019, led by the company’s acquisition of Twenty First Century Fox in March 2019. Disney acquired its competitor’s film and television studios, as well as its US cable and satellite channels, such as Fox Networks Group International, a 73% stake in National Geographic Partners, Indian television broadcaster Star India, and a 30% stake in Hulu. The acquisition let the company add Twenty First Century Fox’s assets and products contribute to Disney’s content portfolio. Fox’s television business is expected to increase Disney’s TV presence globally. In fact, one of the main reasons Disney acquired Fox was in order to strengthen its TV slate on a global basis and increase its international footprint after the acquisition. One should know that Fox Networks International operates above 350 channels in 170 countries and is a leader in this sector.
In fact, Disney’s Studio Entertainment segment has got an impressive line-up of huge budget movies that would be released over the next 18 months, such as Mulan, Free Guy and Black Widow.

By looking at the financials, we should say that Disney’s net profits had been very solid as well in the past few years before the COVID-19 pandemic.

Looking at the current situation, we should note that Disney has been hurt significantly by the virus and sales as well as net profits have decreased. In fact, the company’s sales decreased almost 50% in the 9 months period between September 2019 and June 2020.

The company has managed to keep growing its business in the past few years and deliver strong financial figures without overleveraging itself. In other words, the debt-to-equity ratio of Walt Disney had been only between 0.37 and 0.40 before the pandemic, meaning the company has been growing mainly organically, without taking too much debt and putting its financial performance under risk. Now, due to the virus and the fact that the company has been losing money caused by the closure of the Disney resorts and not operating properly for a few months, the company needed to issue some more debt. Therefore, the debt-to-equity-ratio has grown to 0.60. Let’s face it. There has been an increase in the ratio and the company has leveraged itself a bit more. However, it is not overleveraged and we believe it is only a matter of time before the company manages to decrease the debt in its financial statements and bring it back to the levels it used to be in early 2020. Of course, we take into account the fact that it might take some more time for that due to the 2nd wave of coronavirus and thus the lower revenues coming from the company’s resorts.

Yet, due to the coronavirus correction, the share price is currently at $127, meaning it is trading at only 2.55x its book value, making it an attractive investment.

Disney+: The Company’s great success in the past year

Walt Disney Co. launched its own direct-to-consumer service Disney+ on November 12, 2019 in the United States, Canada and the Netherlands, followed by its debut in Australia, New Zealand and Puerto Rico a week later. The service was launched on March 24 in different markets across Western Europe – the UK, Ireland, France, Germany, Italy, Spain, Austria and Switzerland, together with India a week later. Disney+ offers nearly 500 movies and 7,500 episodes of television from a variety of different brands, such as Disney, Marvel, Pixar, Star Wars and National Geographic, as well as Disney+ originals. Furthermore, Disney+ only costs $6.99 a month or $69.99 a year, which is half the price of their competitors at Netflix for example.

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