Is Disney A Good Investment?

Is Disney a good investment? Most hedge funds have at least one or more Dow stocks in their portfolios. Some even invest strictly in mega-cap blue chip stocks. Companies that fit this profile tend to be stable performers – and Walt Disney Co (DIS) is no exception. The company has returned almost 10% a year (annualized) since 1962 versus roughly 7% for the market at large.

Disney was owned by 33 hedge funds at the end of 2011. These hedge funds had a total of $2.53 billion invested in Disney at the end of the fourth quarter. Ric Dillon’s Diamond Hill Capital, for instance, initiated a brand new $58 million position in Walt Disney over the fourth quarter last year. Tom Gayner, Ken Griffin, Richard Chilton, Wallace Weitz, Jeffrey Vinik and Ray Dalio are also bullish about the company.


Disney offers a diversified portfolio of products and services globally, including ownership interest in Disneyland Paris and Hong Kong Disneyland Resort. It operates in media networks, parks and resorts, studio entertainment, consumer products, and interactive media. For FY 2011, over 20% of Disney’s revenues were generated internationally. Over the past few years, Disney has been expanding its business largely through acquisition. The company completed an acquisition of Marvel Entertainment Inc for $4 billion at the end of 2009, with it Disney gained Marvel’s library of more than 5,000 comic book characters. Disney also purchased Retail Networks Company and Playdom in 2010. Currently, the company has a few ongoing expansion projects.

In 2012, Disney plans to open a new Disneyland’s California Adventure and launch another cruise ship. The company is also constructing a theme park in Shanghai, China, which is scheduled to open in 2016. We think these acquisitions and projects will boost the company’s revenues over the next couple of years. On the other hand, Disney has also been restructuring its operations by divesting some of its non-core assets. It sold ABC radio assets in 2007 and Miramax film in 2010. These divestitures generated cash flows and enabled Disney to better focus on and grow its core businesses.

Disney also has a solid balance sheet and leverage ratio to its credit. As of December 31, 2011, the company had a net debt of $10.6 billion. Its EBITDA in 2011 was $9.96 billion, so it has a reasonable net debt to EBITDA ratio of 1.06. We think the company has the financial flexibility for paying out dividends and repurchasing shares. In fact, in December last year, Disney significantly raised its annual dividend by 50% from $0.4 per share to $0.6 per share. Walt Disney’s low payout ratio of 23% indicates that the company has the ability to further increase its dividends in the future. In addition to dividend payments, Walt Disney is also authorized to repurchase 400 million shares. It bought back 80 million shares in FY 2010, 135 million shares in FY 2011, and 33 million shares as of February FY 2012.

With regard to valuation, Walt Disney has a current P/E ratio of 15.91, versus its industry’s average of 18.14. The company is expected to earn $2.95 per share in 2012 and $3.39 per share in 2013. This makes its forward P/E ratio about 14.23, a discount to its industry’s average of 16. Disney’s main competitors, News Corp (NWS) and Time Warner (TWX), seem to have even more attractive valuation levels compared with Walt Disney. News Corp has a P/E ratio for 2013 of 11.57 while Time Warner’s P/E ratio for 2013 is 10.09, versus 12.44 for Walt Disney.

Of these, we like News Corp the most. The company has the highest earnings growth potential of the group. Its earnings are expected to grow at 15.7% annually over the next couple of years, versus 12.7% for Walt Disney and 11.6% for Time Warner. It is also the most popular entertainment stock amongst the hedge funds we track. Sixty-two hedge fund managers disclosed owning News Corp in their 13F portfolios at the end of last year, including Eric Mindich, Lee Ainslie, John Paulson, and Andreas Halvorsen (see billionaire John Paulson ‘s new stock picks).