Disney stock topped out around $121 in summer 2015, when substantial numbers of cable-TV viewers began canceling expensive subscriptions and migrating to streams.
After the stock ranged $90 to $120 for nearly five years, Disney could be bought for less than $110 before CEO Bob Iger in April laid out the company's streaming plans. In less than three months since, the stock has rocketed 31% to $142 from $108.
In short, nearly all the gains certain Disney investors have made during the past half decade have come in the past 90 days.
This is exactly why maintaining a long-term mindset, not panicking during times of weakness, and being willing to buy and hold high-quality stocks are so important for investors.
When blue chips are clouded, their fundamentals often are slowly improving below the surface. While the market focused on cord-cutting and Disney's apparent lack of streaming potential, management clearly was developing a plan to generate results.
Strong Bottom-Line Results
Let's look at Disney's operations from the end of 2015 to now.
Revenue has increased 13%, not a lot of top-line growth in four years. But margins have widened, net income is up 31% and earnings per share have leaped 49%. Free cash flow is up 43%.
Dividends are up and prior to the recent Fox deal closing, Disney's share count was way down. The company diluted the share base a bit by bringing the Fox assets into the fold. Yet those assets (especially on the content IP side of things) and the talent that came along with the Fox properties played an integral role in Iger's plans for Disney's streaming rollout.
It's this underlying performance that pushed down Disney's fundamental multiples and created what can now be best described as a coiled spring. Investors now appear poised to take the stock higher.
For comparison, Disney's streaming rival Netflix (NFLX - Get Report) largely doesn't have Disney's numbers. During the trailing 12 months, Netflix generated free cash flow of negative $2.8 billion compared to Disney's positive $9.5 billion figure.
Two key exceptions: Netflix's top-line growth -- a near tripling over the past five years -- has sharply exceeded Disney's. And Netflix now has 150 million paid subscribers and that's a total that Disney Plus probably won't touch for years.
But Netflix is currently trading at 120 times earnings while Disney shares are trading for just 21x. Disney isn't likely to trade at a triple-digit multiple anytime soon, but if investors are willing to pay up that much for Netflix, one can see where they'd pay a high premium for Disney as well.
Keeping a Long-Term Mindset
Over the past 15 years or so, Disney shares have found resistance beyond the 20x multiple. In other words, they're currently banging up against the top of a long-term channel. And we can't be sure whether Disney will remain range-bound or the new digital prospects will send it soaring.
It's important to note that Disney remains a somewhat cyclical company and any downturn in the broader economy will hurt its current outlook. From the box office to its theme-park admissions, this company relies on a healthy consumer to succeed.
Adding low-priced streaming options to its revenue stream will smooth out some of its economic sensitivity. But if economic growth slows, it becomes harder to justify a 20x multiple on a consumer discretionary name like Disney.
But getting back to the buy-and-hold thesis that I began with, I'll say that to long-term Disney investors, it probably doesn't matter all that much.
This company remains the king of content and its operations are firing on all cylinders. To me, this is a company to own, not trade.
Instead of fretting about valuations and short-term share-price volatility, I'm content to sit back and simply enjoy the entertainment that Disney produces.
Toy Story 4 was just released, to rave reviews and the potential to be yet another billion-dollar box-office blockbuster for the company. The live-action Lion King remake is set to open next month, which should add to Disney's success. All these characters essentially print money up and down Disney's multi-tiered revenue stream.
As a shareholder myself, I'm whistling Hakuna Matata and watching the stock do its best Buzz Lightyear impression: "To infinity, and beyond!"