Why Disney Is an Attractive Investment

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Its theme parks have been the typical vacation spots for people from all over the world for years. The Walt Disney Company (NYSE: DIS) was founded way back in 1923, and has become iconic of the American lifestyle. Attracting multitudinous visitors each year, their hotel services are some of the best in the world. Surprisingly, though, the company is even more dominant in the media industry. With fantastic financials backed by enticing valuation multiples, Disney makes for a great investment. 

The massive company recently reported $42.28 billion in revenue, a staggering number to say the least. In the past ten years, as Disney grows and improves itself, this number has been increasing steadily at an impressive and consistent rate, as shown by the chart below.

<img alt="" src="http://media.ycharts.com/charts/e0150892225dc4308daba47667987752.png" />

DIS Revenue Annual data by YCharts

Effectiveness of operations compared to competitors

Disney currently has Bob Iger at the helm, and he has done a wonderful job of managing the company. Disney operates in an extremely efficient and effective manner, and there are a number of statistics that reflect this. The company's profit margin is currently at 13.64%. The operating margin? An even more impressive 21.19%. The return on assets has been 7.40% while return on equity has been 15.43%. Undeniably, this statistics show the impressive results that Disney has received by operating using the strategies that they do.

Now let's take a look at two of Disney's main competitors, News Corp. (NASDAQ: NWS) and Time Warner (NYSE: TWX). Although each of these two companies look impressive in some of these statistical measures, Disney is much more consistent across the board. For example, News Corp. has an ROA of only 5.56%. Time Warner is comparatively weak in its profit margin of 11%.

One of the possible reasons why Disney operates more effectively could be because of the fact that it is a much more diversified company than the two competitors. News Corp. and Time Warner don't have Walt Disney World Resort and Disneyland to fall back on if the media industry is hit with a tough quarter. This diversification can help Disney keep its margins more consistent and impressive. Just like investors want a diversified portfolio, a company should want diversified operating segments.

Narrowing the scope: Disney's financials and multiples

In early May of 2013, Disney reported results for the quarterly period ended March 30. There were a number of statistics that were quite encouraging for the company. For example, revenues jumped from $9.629 billion to $10.554 billion. Net income increased a significant amount as well, going from $1.226 billion to $1.621 billion. Diluted EPS went from $0.63 to $0.83, an impressive jump to say the least. The media networks segment (which, contrary to popular belief, makes up a larger chunk of revenue than parks and resorts) experienced an increase in revenue from $4.692 billion to $4.957 billion. The four other segments that Disney operates were able to increase quarterly revenues as well. These revenue increases were as follows:

  • Media networks: 6%
  • Parks and resorts: 11%
  • Studio entertainment: 3%
  • Consumer products: 9%
  • Interactive: 6%

This consistent, all around growth was accompanied by a few key strategic moves, arguably the most important of which was Disney's acquisition of Lucasfilm on December 21, 2012. 

In the standard discussion of results that comes with each quarterly report, management pointed out a few key points. The company attributed its 32% increase in EPS to "improved performance at all of our operating segments led by Studio Entertainment, Parks and Resorts and Media Networks, and a lower effective income tax rate driven by favorable tax adjustments related to pre-tax earnings in prior years." One driver of revenue increases in the media networks segment was an increase of 13% in affiliate fee revenue. This was primarily a result of "increases of 7% from contractual rate increases at ESPN."

One of the few signs of trouble, albeit a slightly insignificant one, was a 7% drop in cash provided by operations (six months ended). This decrease was a result of higher cash payments at corporate, studio entertainment, parks and resorts and media networks. This is not that bad of a sign, though, because a lot of the increase in cash payments can be attributed to investments in the different operating segments, which totaled $1.119 billion. 

Because of these strong fundamentals that the business operates with, success appears to be flowing in quite easily for Disney. At the current price, Disney's stock looks very attractive. It is trading at 19.65 times trailing earnings, has a price/book  of 2.70, and a price/sales of 2.60. Surprisingly, this is an aspect in which Disney's competitors seem to have an edge. News Corp. has a 12.60 price to earnings ratio and Time Warner's is 17.63. I suppose, though, that with the kind of fame and optimism that has surrounded Disney for decades upon decades, it is not surprising to see that the stock has built up a slightly higher premium than that of its competitors. Regardless, the multiples of Disney are still quite attractive. On top of all this, Disney offers a $0.75 per share dividend.

The bottom line

Overall, Disney is driven by strong growth that is occurring at an efficient and safe level and backed by numerous statistics. If Disney continues to grow and prosper at the rate it historically has, the stock price is likely to continue to rise for years to come, as Disney grabs an even larger share of both the media and hotel markets. 

It's easy to forget that Walt Disney is more than just the House of Mouse. True, Disney amusement parks around the world hosted more than 121 million guests in 2011. But from its vast catalog of characters to its monster collection of media networks, much of Disney’s allure for investors lies in its diversity, and The Motley Fool's premium research report lays out the case for investing in Disney today. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. So don't miss out -- simply click here now to claim your copy today.

Bryan Wagman has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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