Several Wall Street analysts have begun to question Disney’s growth prospects, so it was surprising to see Bernstein Research’s newly hired media analyst Todd Juenger initiate his coverage by projecting that the entertainment giant will outperform the market. But his detailed report on the company, out this morning, also bucks the conventional wisdom by making one of the strongest arguments I’ve seen in a while for CEOs to invest in their businesses instead of doing what most Big Media companies have done: They generate a quick pop in their stock prices by returning cash to investors through dividends or stock repurchases. The promise of organic growth is “why investors put cash into a company to begin with,” Juenger says. “Growth creates a thriving entity that will create more options and opportunities in the future.” Disney’s placing its biggest spending bets on its theme park business including cruise ships, and construction at California Adventure, Disneyworld Fantasy Land, Disneyworld Avatar Land, Hong Kong Disneyland, and Shanghai Disneyland. Junger says that the company’s $6.4B worth of investments will create $8.5B in value. But that’s not reflected in Disney’s stock price (which opened today at $42.24), Juenger says, because most of the returns won’t be seen until after 2016 — which is too far into the future for most investors. Yet the analyst says Disney’s cash flow could soon begin to “accelerate like a slingshot”: The spending outlays will to decline just as the returns from the investments grow.
What about the growing sense that Disney’s already highly valued, and could run into trouble this year? Analysts including Wells Fargo Securities’ Marci Ryvicker and Barclays Capital’s Anthony DiClemente recently urged investors to be careful: For example, cash cow ESPN is grappling with soaring costs for sports rights, growing competition from rivals including the NBC Sports Network — and pay TV operators’ intensifying objections to its annual price hikes. Meanwhile Disney’s film business is a question mark as the number of releases declines to about 10 this year from 16. And ABC’s ratings, Ryvicker charitably says, “have been underwhelming.”
Juenger seems unfazed. The sports network still has “the strongest pricing power of all cable networks,” and can continue to boost its fees by about 8% a year as pay TV providers look to add TV Everywhere streaming rights, he says. Advertising will hold up because ESPN delivers “hard-to-find male viewers who don’t fast-forward through commercials.” While the analyst acknowledges that “making movies is a crappy business with terrible structural dynamics,” he believes Disney will benefit from sales in growing overseas markets — especially in China and India. Kids’ films also should hold up in the declining home video market. “We all probably know someone who has a collection of Disney DVDs,” he says. “I don’t know anyone who collects Paramount DVDs.” Juenger doesn’t address ABC’s problems or prospects.