Disney Stock: Three Reasons to Be Bullish on Walt Disney Co

Disney StockUpside for Disney Stock

Star Wars fans loved the new movie, but that enthusiasm hasn’t really translated into Walt Disney Co (NYSE:DIS) stock. It could be that investors were buying Disney stock before the movie’s release and selling it on the news. Either way, Disney’s stock price has slipped quite a bit.

But that doesn’t mean you should give up on the company. In fact, this could be a great opportunity to consider getting onboard Disney stock. Let me explain.

Box Office Success

When it comes to box office success, there is no company in the world that is in better shape than Disney right now. And that’s largely due to CEO Bob Iger’s smart decision to acquire Lucasfilm a few years ago. (Source: “Disney Buys Lucasfilm for $4 billion,” USA Today, October 30, 2012.)

You see, George Lucas created the Star Wars franchise and Disney wanted to get hold of it. After a one-and-a-half year pursuit, Disney finally reached a deal with the Star Wars creator, buying LucasFilm for $4.0 billion.

The price tag might seem a bit steep. But as it turns out, Bob Iger couldn’t be more right about the decision.

The company released the latest installment Star Wars: The Force Awakens on December 18, 2015. In just 20 days, the movie had surpassed Avatar to become the highest grossing film of all time in the U.S. Fast-forward to today and the movie has made over $2.0 billion at the box office worldwide. (Source: “Star Wars: The Force Awakens,” Box Office Mojo, last accessed April 7, 2016.)

When you have such an enormous fan base, ramping up production might not be a bad idea. And that’s exactly what Disney is doing right now. The company is scheduled to release another new movie, Rogue One: A Star Wars Story, on December 16, 2016. Filming has already been completed and the movie is in the post-production phase.

Merchandise

Disney’s creations need little introduction. So it shouldn’t be a surprise that its toys and merchandise are also popular. In the most recent fiscal quarter, the company’s Consumer Products & Interactive Media revenue increased eight percent year-over-year to $1.9 billion. Operating income from the segment surged 23% year-over-year to $860 million. Disney said that the higher operating income was mostly due to growth in its Merchandise Licensing business. (Source: “The Walt Disney Company Reports Record Quarterly Earnings for the First Quarter of Fiscal 2016,” Walt Disney Co, February 9, 2016.)

As is the case with box office success, the biggest catalyst for Disney’s merchandise business is none other than Star Wars. According to Aswath Damodaran, a professor of finance at the Stern School of Business at NYU, “The Star Wars movies have historically generated $1.80 in revenues from toys/merchandise for every dollar in box office revenues.” Moreover, given what he calls “Disney’s prowess at merchandising,” Damodaran notes that he “would not be surprised to see this number go up.” (Source: “Intergalactic Finance: Valuing the Star Wars Franchise,” Aswath Damodaran Blog, December 28, 2015.)

Theme Parks

Let’s not forget what Disney has been building in the last five years—the Shanghai Disney Resort. Scheduled to open on June 16, the resort is going to be the first Disney theme park in Mainland China.

The resort is going to be absolutely massive. At 963 acres, it’s about three times the size of Hong Kong Disneyland Park. Moreover, the Enchanted Storybook Castle in the Shanghai Disney Resort will be the largest of any of the company’s theme parks. (Source: “Disney’s Bob Iger Discusses Shanghai Resort, Star Wars and ESPN at Media Conference,” LA Times, March 8, 2016.)

Given Disney’s huge fan base in China and the resort’s convenient location, the theme park in Shanghai could become a huge cash machine for the company.

The Bottom Line on Disney Stock

Trading at $96.11 today, Disney stock has a price-to-earnings multiple of 17.96X. Given what the company has going on, there could be a lot of potential that’s yet to be realized in Disney stock.