Investment banking giant Goldman Sachs recently made a rare move last week. It added Walt Disney Company’s stock to its “Americas Conviction Buy” List and reaffirmed its buy rating on the media giant.
Why is this so important? First its important to know what a conviction buy is.
A conviction buy is rare to say the least. It occurs when analysts and fund managers are convinced their analysis of a stock projection is correct and believe they will earn an outstanding return on holding the company's stock. Although the term is not used often on Wall Street, large firms like Goldman Sachs and many boutique investment firms have conviction buy lists. Goldman Sachs doesn’t update this list quarterly or yearly but adds and drops companies as it sees fit. Disney's addition to this list is significant.
Goldman Sachs set Disney’s stock price target at $138 per share in the next 12 months. That’s a 22% increase from its $113 stock price when the announcement was made. Here are some reasons why the stock is projected to do well.
Box Office Success
Goldman Sachs thinks Disney is a top stock because the film division should drive record studio earnings in fiscal 2017 and 2018. The next two years are expected to be Disney’s best lineup of films ever. Here are a few of the big releases set to come out:
- Guardians of the Galaxy Vol. 2- April 2017
- Cars 3- July 2017
- Pirates of the Caribbean: Dead Men Tell No Tales- May 2017
- Thor: Ragnarok- November 2017
- Star Wars: The Last Jedi- December 2017
- Black Panther- February 2018
- Avengers Infinity war- April 2018
- Toy Story 4- July 2018
- Mulan (Live Action Remake)- November 2018
These big-name blockbusters are sure to rack up significant box office revenue.
In addition, Disney’s recent box office performance - the live-action remake of “Beauty and the Beast” - has had tremendous success by recording the 6th highest opening weekend box office ever. After just a month, it earned 500 million in the US and 1 billion dollars worldwide. To put this into comparison, Disney films surpassed just over $3 billion in U.S. box office sales in 2016, which was an industry record.
It’s not just box office sales that makes Disney look so good. There are growth catalysts across most of Disney’s assets. Upcoming movie series like Star Wars, Cars, and Avengers have large consumer product and licensing opportunities so revenue will continue long after the movies have left the big screen. On top of that, Disney’s sports entertainment subsidiary ESPN is growing fast from its contract with the NBA. Disney Theme Parks are expecting record profits in the next two years as well.
In case you didn’t know, here are just some of the companies owned by Walt Disney Co:
- Walt Disney Pictures
- Pixar Animation Studios
- Lucasfilm Ltd.
- Marvel Studios
- Touchstone Pictures
- Walt Disney Records
- Hollywood Records
- Disney Theatrical Productions
- Disney Store Worldwide Inc.
- Disney Publishing Worldwide
- Walt Disney Parks and Resorts
- Disney Cruise Line
- ABC Television Group
- Disney Channels Worldwide
- ESPN Inc.
By owning so many subsidiaries that complement each other and compete in different product markets, Disney minimizes company risk and diversifies its revenue streams. There is, high growth expected amongst most of Disney’s subsidiaries in the next two years. This is especially true if there box office hits continue to do well. Successful movies will get people buying merchandise, visiting theme parks and looking for the next big hit. This all means high expected top line revenue growth.
Walt Disney Co. has been steadily improving its return on equity. Over the last 5 years, Disney has grown its ROE by a whopping 52%. Investors love companies with increasing returns on equity because it shows how well a company is reinvesting the capital shareholders have invested. It is a sign that manager's can effectively find opportunitie and then capitalize on them.
Net Income Growth
Disney’s bottom line has also increased steadily over time as it has become better at controlling operating costs. In the last 5 years, Disney has pocketed $14 of every $100 in revenue and net income grew by 65% while revenue grew by 32%. We can only expect net profit to increase as Disney brings in more box office revenue over the next two years. While these movies are expensive to create, each additionnal movie ticket that is sold beyond the break even point if pure profit. That's why box office hits, such as Beauty and the Beast, are so profitable for the company.
Goldman Sachs' team of expert analysts predicts Disney stock to perform very well in the future. The trend in ROE and net profit margins certainly tells a similar story. With revenues increasing across the board for Disney’s subsidiaries and a blockbuster lineup of upcoming flicks, it’s easy to see why Goldman Sachs loves Disney so much. The house of mouse is not looking to slow down anytime soon and will continue to assert its dominance on the big screen and the stock charts.