4 Reasons to Buy Disney Stock NOW

Popular Posts: 3 Preferred Stocks Yielding More Than 8%3 Covered Calls for a Cool $1,000 in Income4 Value Trap Stocks to Sell Before It’s Too Late Recent Posts: 4 Reasons to Buy Disney Stock NOW 3 ‘Forever Hold’ Stocks, 3 Ways to Make Income 4 Value Trap Stocks to Sell Before It’s Too Late View All Posts

There are some stocks I consider "forever hold" stocks because of the role the companies play in our lives, because they are absolutely essential to life on earth. And while Disney (DIS) isn’t quite as essential as, say, energy, it has ingrained itself into the global culture in a way that few other companies have.

In fact, Disney stock is a great buy right now for a number of reasons. Here are four of the best:

#1 — Nobody Understands Entertainment Better

Disney understands its customers better than any other entertainment company in the world. That's because it has always hewed closely to its brand – family comes first. Even as the culture has changed and teens have sought out more edgy material, Disney has programmed its television platforms to serve these audiences. The studio's original family-branded films always do well at the box office and in ancillary markets.

The studio also recognizes blockbuster potential. By purchasing Pixar, Marvel, and LucasFilm, the studio locked up three of the most powerful film brands in history. And for Disney stock, the films and ancillary market revenue from these acquisitions will literally pay off for decades.

#2 — Quality

Everything Disney gets involved with meets its legendary standards of high quality.

Its parks and resorts deliver on their intended experience. Sure, we can complain about crowds, but that isn’t Disney's fault — in fact, it speaks to the company’s success. People are willing to endure long lines and fight for space along the parade route and deal with the crowds because they know their kids will love the experience (and the adults will, too).

The film studio consistently makes good movies. Sure, they produce a stinker now and then, but based on box office receipts, parents associate Disney films with "quality family entertainment.” This also goes back to the Pixar, Marvel and LucasFilm acquisitions. Disney isn't just satisfied with internal content creation. It’s also on the hunt for quality content from other sources, and it and acquires that content when it can.

Despite the ubiquity of Disney toys, I actually think Disney’s consumer products is the company's weakest segment. A lot of the plastic toys I purchased for my kids were overpriced and junky. You'll never go wrong with a plush toy, but other consumer products have fallen short of the quality standards I expect. Still, the overall quality of Disney’s products extends all the way to Disney stock.

#3 — Pricing Power

Take a look at this chart of Disney theme park prices over the years. In 1971, the cost for one day at Disney World was $3.50. Today, it costs $99. The average annual inflation rate since 1971 is around 4.2%. Disney's price hikes average close to 8.25%. The ability of a corporation to sell its product consistently and effectively, and do so with increases at twice the rate of inflation? That's like having your own magic lamp.

#4 — Great Financials

As a diversified media company, Disney survived the financial crisis easily. That’s not surprising, because Disney is a cash flow machine. FCF ranges between $3.5 billion and $6 billion annually, and Disney stock generally pays out about 25% as a dividend.

DIS is loaded with $6.8 billion in cash and $10.9 billion in debt that only costs $235 million in interest each year … which amounts to about 2.5% of operating income. That's nothing. Disney is thus funding its empire with very cheap debt while simultaneously reaping massive growth.

Disney is a buy because it’s a "forever hold" stock. Disney stock is trading around $82, so on FY14 estimates of $4.19, it trades at about 20x earnings. Long-term growth is pegged at 16%, but I grant Disney the premium for its brand and its cash flow.

As of this writing, Lawrence Meyers was long DIS.