The Walt Disney Company, more affectionately known as Disney, is the world’s largest media company (in terms of revenue) and a household name synonymous with family entertainment.
The business comprises of four primary divisions, namely: Media Networks, Parks Experiences & Consumer Products, Studio Entertainment and now the Direct-To-Consumer & International businesses.
The Media Networks segment is made up of the broadcast, cable, radio, publishing and digital businesses across two divisions – the Disney/ABC Television Group and ESPN Inc.
This division has been the largest contributor to revenue historically, although subscriber numbers have started to come under pressure. Scheduled watching of television is migrating to the online streaming space.
Disney is aware of this and in turn has set up its Direct-To-Consumer & International segment, which comprises of Disney’s international media businesses and the company’s various streaming services and is expected to be a key driver to group revenue and success going forward.
This segment aligns technology, content and distribution platforms to expand the company’s global footprint and deliver world-class, personalised entertainment experiences to consumers globally.
The parks and consumer products division brings Disney’s stories, characters and franchises to life through parks, resorts, toys, apps, apparel, books and stores.
It remains a highly profitable segment of the business, compounding the success of Disney’s content.
Walt Disney Studios has been the foundation on which the company was built. It continues to bring quality movies, music and stage plays to consumers throughout the world.
Content from Disney’s Marvel, Lucas Film and Pixar studios have seen this segment continuing to perform well, with quarterly revenues up 20% and operating income growth in the low double digits as of the third quarter (Q3) of 2018.
Acquisition of 21st Century Fox
After a short bidding war with Comcast, Disney now looks set to complete the acquisition of 21st Century Fox.
Shareholders of Fox and Disney have already approved the deal. Various international regulators still need to approve it, although the US justice department has given the go-ahead.
The acquisition will see Disney gaining access to Fox’s large catalogue of content, networks and intellectual property.
The company will have to divest from Fox’s sports network (in lieu of its ESPN holding) and will also not be acquiring some of the broadcast networks such as Fox News.
Quality of content is arguably the most important aspect of a media house’s success and Disney’s already leading position in the Studio Entertainment division now appears unsurpassable with the inclusion of Fox Entertainment.
Streaming is the future of television. In fact, it’s already here. Companies like Netflix have shown that appetite for on-demand entertainment is ever growing and that consumers are willing to pay for quality of content.
Disney is set to grow into the online streaming space in a phased approach and boasts a market-leading contingent of content to do so.
The ESPN+ streaming service, which follows select sport coverage (not yet the full bouquet offered by cable television’s ESPN sport) was launched in April this year and is estimated to have nearly 4m subscribers in just a few months.
Disney will look to launch its entertainment streaming channels in 2019 with new and exclusive content such as new series, including Star Wars, Marvel and High School Musical, to name but a few.
While Disney looks to challenge the Netflix lead in online entertainment, there is certainly room for many more competitors to exist in the space which is growing rapidly and is far from saturated just yet.
The investment case
The Walt Disney Company continues to achieve high double-digit earnings growth (with an 18% quarterly increase in earnings per share (EPS) excluding one-off items, and 28% growth including one-off items EPS in Q3 2018).
The company still trades at a relatively conservative price-to-earnings (P/E) valuation of 14, a discount to the broadcasting and media industry which sits at a P/E of around 20.
Investors are also offered a modest dividend yield of 1.45%.
While the Media Networks segment growth remains relatively stagnant, diversification into the online streaming business is already under way, and is expected to be the major lever of earnings growth for the business in years to come.
Disney, enhanced by the Fox acquisition, arguably has the most formidable content proposal, which should harness the streaming proposal set to launch in 2019.
The studios and theme park businesses remain a strong support base for group earnings.
Disney has a market-leading position in the entertainment and media space.
At fairly unchallenging multiples, the company seems a relative value proposition.
The opportunity for growth remains strong as the business only just begins to transition into the online space. Left to rest in a long-term portfolio, the addition of Disney would suggest a healthy diversification into the media space, with the potential for significant growth, at what appears to be an opportune price entry right now.