It was just a few years ago that The Walt Disney Co. (NYSE: DIS) was one of the market’s top growth stocks. But things have dramatically changed. Disney stock is down 11% so far in 2016, making it one of the worst-performing stocks in the Dow Jones Industrial Average this year.
Investors are nervous about the state of Disney’s flagship cable channel ESPN, which has suffered with falling subscribers. Now that consumers have embraced cord-cutting and are ditching expensive cable packages in favor of cheaper Internet streaming options, investors are worried that Disney’s bread-and-butter television channel is in deep trouble.
But these worries are overblown. Not only is ESPN going to have a place in the next era of television, but Disney’s diversified business model is still producing impressive growth. For that reason, investors should look at Disney’s share price decline this year as an excellent buying opportunity.
There’s No Fire Here
Judging by the price decline for Disney shares, investors would naturally expect that the company is in financial trouble. But that is simply not the case. Instead, Disney has continued to generate growth. For example, Disney’s revenue and earnings per share increased 7% and 15% last year, respectively. Disney produced $6.6 billion of free cash flow in 2015.
This year, the company has seen a bit of a slowdown at ESPN, noting modest subscriber losses to start 2016. But overall, Disney is still doing very well. In fact, its growth has actually accelerated so far this year; revenue and EPS are up 9% and 17%, respectively, through the first three fiscal quarters.
Disney has generated $5.7 billion of free cash flow over the first three fiscal quarters, up 26% from the same period in fiscal 2015.
And, Disney has seen broad-based growth so far this year, even in its Media Networks business, which is supposedly in trouble. Revenue there is still up 3% over the first nine months of the fiscal year. Plus, business is booming across Disney’s studio business. Revenue there soared 37% over the first three fiscal quarters, driven by the smash hit Star Wars: The Force Awakens, as well as Pixar.
Disney’s Growth Catalysts
Going forward, investors can expect many more iterations of Star Wars, plenty more Pixar animated films, as well as continued growth in its theme parks business.
Disney recently opened a new park in Shanghai, China. This was a massive $5.5 billion project. There is a good chance Shanghai Disney will be a huge success. Disney’s brand has really caught on in Asia; Tokyo Disney itself generated nearly $700 million in profit last year.
China is a key emerging market, with a population exceeding 1 billion and a rising consumer class. According to the company, 330 million people live within three hours of Shanghai Disney. It is expected to reach break-even two years from now, and is projected to rake in more than $200 million of profit by 2019.
ESPN Concerns Are Overblown
As far as ESPN, there admittedly could be further subscriber losses in store, especially if consumers continue to cut the cord. However, some of these subscriber losses are being offset by higher affiliate revenue.
It’s important to remember that ESPN is arguably the most valuable brand in sports. It has a key operating advantage that should protect it against cord-cutting, which is live sports. While consumers love to binge on television shows and movies, the one thing they can’t binge on is sports.
The vast majority of consumers want to watch sports live. TV and movies can be watched weeks after they are released, but sports events don’t work that way.
Buy Disney Shares While You Can
The one good thing about Disney’s selloff this year is that it gives investors a great buying opportunity. Disney stock trades for a P/E of 16, which is below the S&P 500 P/E of 20. Its 11 different properties bring in at least $1 billion in revenue each year.
Disney also offers a 1.5% dividend yield, which is a nice added bonus.
The bottom line is that Disney will be fine, thanks to its large and diversified business, with a long runway of growth up ahead.
Disclosure: The author is long DIS.