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It’s Time to Change the Way You Look at Disney Forever

1 | By Michael A. Robinson

Fitbit Inc. (NYSE: FIT) had a very successful initial public offering (IPO) last week.

Shares of the wearable tech leader soared 48% from their offering price. The success underscores the growth ahead for wearables – especially the health and fitness applications where Fitbit excels.

Forecasters at IDTechEx project sales of wearable electronics will hit $20 billion next year and will be valued at almost $70 billion a decade later.

As much as I like Fitbit and its technology, my concern here is that you could get hurt by chasing this stock. Indeed, the first six months for any IPO is a volatile period in which new issues often give up much of their early gains.

That’s why I think tech investors would do well to take a look at Walt Disney Co. (NYSE: DIS).

You know it as an entertainment powerhouse.

But you need to start looking at the “Mouse House” differently.

Here’s why…

The Birth of a Wearables Powerhouse

Most investors think of Walt Disney Co. (NYSE: DIS) as anything but a tech-focused firm.

After all, this iconic American firm is famous for its theme parks, its movies and TV shows, and as the birthplace of beloved animated characters like Mickey Mouse and Donald Duck.

Turns out, Disney is developing a line of wearable electronic toys that will connect to the Web. Disney wants to turn its popular movies into an “ecosystem” that can draw in children as tech-focused customers.

Disney believes the new digital toys, which encourage kids to move around, will prove as popular with parents as they are children. Kids can don Iron Man gloves or Hulk fists and then interact with action figures by downloading narrated stories from the Web.

Known as Playmation, the new platform debuts in the fall. If Disney just converts a conservative 10% of its movie receipts into Playmation sales, it could easily generate $300 million in wearable tech revenue.

And I believe this release underscores a big change underway at Disney — behind the scenes, the company is embracing new technologies to grow sales and improve profit margins.

A study last year by Capgemini Consulting shows that Disney is making excellent use of digital formats. For instance, Disney recently unveiled Movies Anywhere, a service that lets consumers discover, buy and watch films across different devices.

In 2013, the firm’s video game unit released Infinity, which allows players to mix and match the company’s popular characters. It went on to become one of the top 10 releases of the year, with initial sales of 3 million units.

At the same time, Disney has embraced data analytics to improve its operations across the board. It now measures everything from customer line wait times at theme parks to inventory control for consumer products to how to more efficiently run its laundry services.

To put these changes in context, I’m going to run Disney through the five filters of “Your Tech Wealth Blueprint.”

Rule No. 1: Great Companies Have Great Operations

CEO Robert A Iger certainly qualifies as a great operator.

After getting the top job in 2005, Iger led the 2006 acquisition of Pixar Animation Studios, which pioneered the use of computer graphics to produce such hit movies at Toy Story, Carsand Finding Nemo.

Iger further developed the movie division with the acquisition of Marvel Entertainment (Iron Man and The Avengers) and Lucasfilm Ltd. (Star Wars and Indiana Jones).

Under Iger, the company has won a string of management awards. Fortunemagazine has named it one of “America’s Most Admired Companies” every year since 2009. And last year, Chief Executive magazine named Iger “CEO of the Year.”

Rule No. 2: Separate the Signal From the Noise

To create real wealth, you have to ignore the not just hype from the company but the noise you often hear on Wall Street.

Indeed, industry analysts roundly criticized Disney’s $4 billion acquisition of Marvel back in 2009. The Wall Street Journal said investors needed “blind faith” to believe the deal would work out.

As of June 21, the latest Avengers movie, Age of Ultron, has grossed nearly $1.4 billion globally. And the original film in the series, released in 2012, brought in $1.5 billion worldwide.

Rule No. 3: Ride the Unstoppable Trends

Look for stocks in red-hot sectors because they offer the best chance for market-beating gains.

There’s no question that Disney has this base covered as well with its moves into wearables and other digital formats.

It’s set to become an even bigger player in computer gaming. The entertainment software market has been growing at 9% annually and had sales last year of $22 billion.

Disney is set to release the movie Star Wars: The Force Awakens on Dec. 18. It’s partnering with Electronic Arts Inc. (Nasdaq: EA) for a video game tied to the movie. Analysts are projecting sales of 9.5 million games in the first few months of release.

Rule No. 4: Focus on Growth

Companies that have the strongest growth rates almost always offer the highest stock returns.

At first glance, Disney seems to be a bit of a laggard here. After all, over the past three years it has had average annual sales growth of 7%.

But let’s put that in perspective. Disney is growing more than twice as a fast as the 2.4% the U.S. economy averaged for GDP growth in 2014.

And Disney has two operations in particular that are driving the company’s sales higher. In its most recent quarter, Disney saw sales for its media networks rise 13% and its sales of consumer products grow by 10%.

Rule No. 5: Target Stocks That Can Double Your Money

This is where we look at Disney’s earnings growth and see how long it will take the firm to double profits. By doing that, we can figure out how long on average it should take for the stock to double.

I’ve gone through the firm’s financials in detail and I’m projecting earnings per share will grow over the next five years by an average 20%. I base that on the fact that Disney has maintained that very same average over the past three years.

Now we use what I call my Doubling Calculator. Mathematicians call it the Rule of 72. Let’s divide the compound growth rate of 20 into the number 72. We find that it should take roughly 3.6 years for Disney’s stock to give us 100% gains.

Trading at $113.50, Disney has a $193 billion market cap. It has 24% operating margins and a 17% return on equity. Over the past year, it has gained 37.2%, more than four times the S&P 500’s 8.2% return.

In other words, Disney is not only a foundational American company – it’s a great foundation for your portfolio. This is the kind of stock that can give you a solid base in a volatile market.

And with its forays into digital technology, the company should be able to keep growing for investors over the long haul.

I’ll see you all next week.

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One Response to It’s Time to Change the Way You Look at Disney Forever

  1. Robert says:

    Thanks Michael,
    I’ve been an investor in Disney for some years; it has a great, solid price chart and performs well in Piotroski’s tests. This article puts some meat on the bones and shows just why it has done so well, and importantly why it’s worth holding onto in the future.
    Best,
    Robert

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