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Disney Is the King of Content

1. Company

Walt Disney Co. (NYSE:DIS) is one of the greatest content producers in the world. The company has been around for nearly a century and is a powerhouse that produces $12 billion in net income and $9 billion in free cash flow annually. These numbers are thanks to the company's ability to produce great content that consumers want. And its large content library and plans for subscription service Disney+ will lead to expanding profits into the future.

Disney has also continued its domination in animation and expanded its movie studio content with the purchase of Marvel Entertainment in 2009. Thanks to this purchase, Disney has set box office records with its superhero franchises. Disney further expanded it's business and content through the purchase of 21st Century Fox and increase of its stake in Hulu to 60%.

At its annual shareholder meeting this year, Disney announced Disney+, its online streaming platform, which is set at $6.99 per month, which is lower than Netflix, the dominant online streaming platform.

2. Disney history

Disney was founded in 1923 by Walter Elias Disney and went public in the 1930s.

Starting in the late 1980s, Disney's animation enjoyed a series of commercial and critical successes. Disney continued to grow and expand in the 1990s. Under Michael Eisner's leadership, Disney earnings grew annually at more than 20% a year. The 1990s saw some of Disney's best animation movies, ranging from Toy Story to the Lion King. Also, the company was able to create numerous hit kids' animation series in the 1990s as well.

Starting in 2005, Disney went on an expansion spree led by its new CEO Bob Iger. The era of Iger kicked off in 2006 with the $7.4 billion all-stock purchase of Pixar. Iger went on to acquire Marvel Studio for $4.24 billion and Lucasfilm for $4.05 billion. These acquisitions have expanded Disney's content library and produced some of the most profitable movie franchises in Disney history. In 2017, Disney acquired some of 21st Century Fox's assets for $71.3 billion. When the merger was complete, Disney owned movie rights to X-Men, Fantastic Four, Galactus and Deadpool, which expanded their Marvel Universe.

3.1 The moat

The company produces a return on equity of 27.6% and assets of 7.7%. Disney's gross margins stand at 44.3% and free cash flow margins at 16.56%. These numbers prove that Disney has a moat around its business. Over the last decade, Disney has grown earning per share at 15% and free cash flow at 14%. Disney's earnings per share going back 20 years have been moving upward with a few down years caused by recessions and crises. This also proves that Disney has a strong and large economic moat.

4. Management

Iger's time as Disney's CEO has made the company better and stronger than ever. Disney is one of the largest and most dominant media companies in the world thanks to him. Throughout his time as CEO of Disney, he has purchased some of the greatest content assets in the world and leveraged them almost perfectly. No wonder Disney's board extended his contract for another year. The board and shareholders aren't ready for Iger to step down.

5. Valuation

Disney currently has an earnings yield of 5.85% and a pretax earnings yield of 6.87%. When you look at Disney as an equity bond with a variable coupon, these yields are great compared to current interest rates. The big difference is a bond value is fixed, and stock value isn't. Therefore, over time, the underlining the value of the equity bond can increase or decrease based on earnings and book value growth.

Over the last 10 years, Disney has grown its earnings per share from $1.75 per share to $8.32 per share at an annual compound rate of 21%. The company grew its book value per share in the same period from $19.03 to $32.52 at an annual compound rate of 58%.

It appears likely that Disney can compound its earnings at 10% going forward, about half of what it produced in the past. So 10 years from now, Disney's earnings per share could be $22.58. Disney's average price-earnings ratio has been 16 times earnings; at that multiplier, the company's stock could be selling for $361.28 per share.


I do not own any shares of Disney and Don't Plan on purchasing any in the next 72 hours

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This article first appeared on GuruFocus.