Disney: A Wide-Moat Stock For Your Porfolio
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With 2008 still fresh in my mind, I'm always looking for stocks that can endure the storms. If there is anyone who has consistently picked out winners that can last for decades, it would have to be Warren Buffett. In his typical straight talk, Buffett breaks it down for us: "In business, I look for economic castles protected by unbreachable 'moats.'" In other words, Buffett invests in companies with durable competitive advantages--companies like Disney (NYSE: DIS).
To determine whether or not a business has wide moat, I always start by breaking down revenue and operating income to evaluate the source of the top and bottom line. Once we see the source, we can determine whether or not it's sustainable.
Disney's Media Networks segment (46%) is made up of international and domestic cable networks and its broadcasting business. The networks include ESPN, Disney Channels Worldwide, and ABC Family--plus 42.1% ownership in A&E, Lifetime Television, and the History Channel. The majority of sales from this segment come from ESPN.
Disney's Parks & Resorts segment (29%) is made up of Disney themed parks and resorts in Florida, California, Hawaii, and partial interests of parks and resorts in Paris (51%), Hong Kong (47%), and Shanghai (43%). This segment also includes three ships for its Disney Cruises.
Disney's Studio Entertainment segment (16%) "produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays" (Disney 2011 annual report). This segment includes Walt Disney Pictures, Pixar and Marvel-branded films.
Its Consumer Products segment (7%) designs and distributes products based on new and existing characters and other intellectual property.
The Interactive Media segment (2%) produces online and console games based on existing and new characters and other intellectual property.
Notice that Media Networks represent just 47% of revenue but a whopping 67% of operating income. This means that we need to take a close look at this category to ensure that it has the characteristics of an "unbreachable moat." To paint a better picture of how this segment impacts Disney, let's examine operating margins (operating income/revenue) over the past three years:
Disney's Treasure Chest: ESPN
Disney's Media Networks segment is much more than its greatest revenue contributor: it contributes far more to the bottom line per dollar of sales (38%) than any other segment. Furthermore, it has contributed incrementally more per dollar in each of the last 3 years.
The largest contributer to this segment is ESPN (75% of cable network sales). ESPN dominates competition, and it's viewed in over 100 million U.S. households. ESPN commands so much power that it is able to earn affiliate fees in addition to ads. Affiliate fees are not common in the industry and they provide higher margins. These affiliate fees are paid by cable, satellite, and telecom providers, representing two-thirds of ESPN's revenue; the remaining one-third comes from ads.
ESPN's most valuable jewel is its contract with the NFL. Fortunately for investors, ESPN recently renewed their contract with the NFL, obtaining rights to 17 Monday Night Football games per year between 2013 and 2021.
As you can see in the chart below, ESPN and the rest of Disney's media networks have handsomely rewarded Disney over the last three years.
Disney's Media Networks segment has the characteristics of a wide moat. ESPN's clout with sports and sports fans is unparalleled. Its networks' contracts and breadth of content result in high barriers to entry, giving smaller competitors little chance. Investors should expect more of the same from this high-performing segment over the next decade.
Parks and resorts and the China expansion
Second to Disney's Media Networks, its Parks & Resorts segment represents 17% of Disney's operating income. In 2011, 10% of every dollar of sales collected by Disney's parks and resorts contributed to operating income. Though not the spectacular 38% contributed by Disney's Media Networks, 10% is still a decent operating margin.
Also, Disney's international expansion in Shanghai, China should be a great addition to Disney's resort and theme park lineup. Though still four-and-half years out, Disney's Shanghai resort and park is an asset that long-term investors can count on.
Disney's themed resorts and parks have insurmountable barriers to entry. Not only are they based on Disney's powerful intellectual property, the upfront capital required for parks and resorts of this size and quality is daunting to any would-be competitor. Investors, therefore, should be able to count on Disney's Parks & Resorts segment to deliver reoccurring sales and profits for for years to come.
One struggling segment, however, is Disney's Interactive Media segment. It's been running at a loss of about $200-300 million for the past three years. But this shouldn't worry investors--the loss is a paltry sum in comparison to total operating income. In addition, the connection Disney is able to make with children through this segment is probably Disney's reason to continue to operate this segment at a loss. This connection, of course, leads to sales in other, more profitable segments.
When Disney's business segments are closely analyzed, it doesn't take long to find that they all share a tight-knit synergy. Just as games connect children to Disney at a young age, the Studio Entertainment segment continues to produce new intellectual property which, in turn, benefits its Consumer Products, Parks & Resorts, and Media Networks segments. This synergy further strengthens Disney's durable competitive advantage.
Fundamentals & Valuation
Unfortunately, finding wide-moat companies is only half the battle. The stock needs to be available at a reasonable price, or even better--a discount! Let's take a look at Disney and see how it measures up to some of its competitors: News Corp, CBS (NYSE: CBS), and Time Warner (NYSE: TWX).
In the table above, Disney stands out as the clear winner in profitability, growth, and financial health. Surprisingly it also measures up well to its peers in terms of valuation.
The bottom line
Disney's powerful media networks, impossible-to-emulate parks and resorts, and studio entertainment backed by stars like Pixar and Marvel provide Disney with an "unbreachable moat." Investors looking for a low-stress, core holding to keep for the long haul should consider adding Disney to their portfolio. At a reasonable price of about $50 per share, Disney's magic should continue to reward investors for decades.
DanielSparks 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.