Is The Force With Disney?

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Disney (NYSE: DIS) recently discussed how pressures in the current quarter were causing panic among investors. So, is there really a cause for concern? Well, I would argue that there's no smoke without fire. There's definitely a fire, says an authority of no less than Chief Financial Officer Jay Rasulo.

After the market close Thursday, Disney posted net income for the quarter of $1.2 billion, up 14 percent from last year’s period. Janney Capital Markets analyst Tony Wible said in a research note on Friday that Disney's advertising growth was slowing and would hamper near-term earnings growth. Wible downgraded his rating on the stock to "neutral" from "buy."

Competitors of Disney, including Time Warner (NYSE: TWX) and News Corporation (NASDAQ: NWS), had better quarters, despite arguably not having the same range of properties that Disney has. Why is that? Well, in News Corp's case, the profit was mainly down due to a one-time gain thanks to the sale of its shares in NBS group to Cisco. The company, headed by Rupert Murdoch, said it increased net income from $738 million to $2.23 billion.

NWS’s cable channels segment made almost a billion dollars in profit in the quarter, because of an 8 percent jump in advertising revenue and a 16 percent increase in revenue from subscriber fees. Its film division made $400 million in profit and its television division (the Fox network and local stations) made $156 million.

Time Warner recently said that its earnings grew by 2% in the most recent quarter. Net income was $838 million, or 86 cents per share, higher than the 82 cents expected by analysts surveyed by FactSet. That compares with $822 million, or 78 cents a share, a year ago. The company said that revenue from its cable TV channels offset the declines in its movie division which hasn't performed as well after the end of the last Harry Potter film last year.

The fact of the matter is that it is irrelevant that Disney 's results have been disappointing in one quarter. The company has a range of assets ranging from theme parks to movies to the animation studio Pixar. In addition, the company has recently purchased the Star Wars movie franchise from George Lucas. This leads to interesting possibilities such as adding new rides and attractions to its theme parks. The company also owns a majority stake in ESPN which provides revenues through NFL in the US and the Barclays Premier League distribution in South East Asia.

Some analysts have questions about Disney’s prospects. Anthony DiClemente of Barclays suggested in a report that “a multitude of items” could yet drag down Disney, such as the advertising picture for perennial cash-cow ESPN. He added: “Disney is the class of entertainment but we await a better entry point.”

The only business that might be vulnerable is the theme park business, which may be the first thing dropped from a family's to do list in adverse economic conditions. The results for Disney’s U.S. parks were flat compared with  last year’s quarter, with higher operating expenses compensating increases in attendance and visitors’ spending. Higher operating costs and fewer visitors will definitely be a problem for the company if it were to happen.

Disney has a P/E of about 15, which isn't incredibly high, is still fairly steep. Disney's P/E, like that of many other large caps, has been in steady decline over the past decade. It's currently below both Royal Caribbean's and Time Warner's P/Es, and is close to Viacom's, despite what can arguably be called a vastly superior portfolio of entertainment options. Disney's average P/E in the past decade is 19.4, much higher than its current valuation. Over the past five years, the company has an average P/E of 15.

The time might be wrong to enter Disney, as the stock currently is as expensive as it has been in recent times, but if you already own stock in a company like Disney, you should hold on. Bob Iger said that this is a transition year for the company, and the coming years will see the company moving into a “more compelling growth mode.”  Disney has made the right investments; soon they'll reap the rewards.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Time Warner. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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