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Using a Value Line Report: Is Disney’s Content a Source of Power or a Problem? - November 11, 2011
Walt Disney’s (DIS – Free Value Line Research Report for Disney) is beloved the world over for its collection of cartoon characters. The company is much more than just a creator of cartoons, which the Business Description clearly outlines, as it also creates live action movies, owns television stations (ABC and ESPN being the most notable), owns and runs amusement parks, and has an expanding cruise line business. Still, when anyone thinks of Disney, the first thought is usually Mickey Mouse and his pals.
That response, however, is carefully crafted and one that Disney management would likely be pleased by. The value of the company’s cast of characters is an important part of the valuation afforded its shares and any sign that Mickey and the gang aren’t holding up to the test of time would be a material negative event. In fact, the Disney characters are sprinkled through most of its businesses in some way. The recent deal inked with Google’s (GOOG) YouTube service, then, should make investors take pause.
Essentially, Disney is going to provide content to YouTube for a “channel” to be aired on YouTube. Disney will use YouTube as a delivery method for content on Disney’s website. It appears that Disney will handle the advertising sales and split the revenue with Google. What does this deal mean?
For Google this is a major success, as a legitimate and important content provider is backing its efforts to create original, professional content for its most recent YouTube efforts. For Disney, however, the meaning is less clear.
Disney has for years tried to push into the web space without much success. This appears to be a statement that management doesn’t know how to make a Disney branded website a big online pull. That said, it is pairing itself with an industry giant in an effort to benefit from the Internet. That’s not a bad choice and the tacit admission has probably been a long time in the coming.
That Disney has been able to maintain a material amount of control over its content, and the advertisers involved, in this deal was probably a key factor in it getting done. It also suggests that both Disney and Google expect the media titan to be successful in garnering ad dollars. This speaks to Disney’s positive view, and likely Google’s opinion, of its content.
That said, the web’s denizens are probably not, directly anyway, the main targets of the Disney brand. In most cases, the youngsters who are probably most familiar with Disney don’t have the freedom to surf the web at will—many probably don’t have the dexterity to type, for that matter. So finding the parents of these kids in a place where they would normally be, such as YouTube or Hulu (a service with which Disney is also involved), might actually be a pretty solid tactic.
Clearly, Disney is going to maintain its own web presence, so it isn’t giving up anything. It is gaining a partner in distribution and, depending on how the partnership actually pans out, a way to potentially simplify its requirements for maintaining its own website—it gets to give up the tech end and stick to what it does best, creating and distributing content. When examined in that light, it seems like a win/win deal.
Investors didn’t exactly cheer the news of the deal with Google, as it was met with something of a yawn, which is not surprising, since the impact is likely to be immaterial to the bottom line at first. Further, the company’s shares have been under pressure for months, falling from a year high about $44 to a low of about $28. They have rebounded slightly to the mid-$30 range of late. (Yearly high and low prices are shown at the top of the Graph.) The dotted line at the bottom of the Graph shows the relative performance of the stock, which has been quite weak, too.
This leaves Disney shares priced at the low end of their historical ranges for P/E, Relative P/E, and Dividend Yield. The recent values for each of these items can be found in the Top Label that runs across the top of each Value Line report, while the Statistical Array displays the historical yearly figures for the same measures. Clearly, the company is trading cheaply relative to historical pricing.
Note, too, that media giant is in solid financial shape, with debt representing just 18% of its Capital Structure, a fact highlighted in the Capital Structure box. It also has $3.5 billion dollars of cash on the balance sheet, shown in the Current Position box. And the shares earn Value Line’s top score for Safety (1, Highest), shown in the Ranks box.
The deal, meanwhile, suggests a management team willing to take some risks to get things right. That’s far more palatable since Disney has the financial strength to withstand a few mistakes along the way. Mistakes are, by the way, something the Google deal suggests management is willing to acknowledge and do something about—a nice thing to see in a management team.
That said, the shares are ranked to mirror the market over the next six to twelve months (its Timeliness Rank is 3, Average). So a quick turnaround isn’t our expectation. However, for an investor with a long-term focus and a belief that Disney’s characters are destined to be classics forever, recent pricing could be a good entry point.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.