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Disney: Firing on all Cylinders

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

Disney's (NYSE: DIS) recent $4 billion acquisition of Lucas Film definitely adds depth to Disney's portfolio of film franchises and trademarks, including Star Wars and Indiana Jones. But this is just one small piece of Disney's $89 billion empire of TV and media properties, movie studios, and theme parks. Even more impressive, when Disney's business segments are closely examined there is a clear trend of increasing pricing power across every segment--a very good indicator of a durable competitive advantage.

Pricing Power

In an interview with the Financial Crisis Inquiry Commission, Warren Buffett said that “The single most important decision in evaluating a business is pricing power." How can we identify pricing power? One way is to look for trends of consistently above average operating margins. Even better, look for trends of above average operating margins that are on the rise.

When analyzing media conglomerates like Disney, however, it's not good enough to analyze operating margins for the company as a whole. Instead, investors should analyze the different business segments of Disney's empire, one by one. Comparing company operating margins to peers is a good start, but digging deeper into each segment is where investors can gain the most insight.

A Disney Dissection

<img src="/media/images/user_13783/disney-profit-breakdown_large.png" />

In the above chart it is clear that Disney derives the majority of its operating income from its Media Networks segment. This segment 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.

Interestingly, Disney's Media Networks segment only represents 46% of revenue, despite a whopping 67% share of the company's total operating income. So not only is this Disney's largest source of profits, it is also the most profitable source.

But let's dig even deeper.

In the chart below it is clear that profits are increasing in each of Disney's four main business segments:

<img src="/media/images/user_13783/disney-operating-income-growth_large.png" />

This is great; operating income is increaseing. But what about operating margins in each business segment?

<img src="/media/images/user_13783/disney-operating-margin-by-segment_large.png" />

As seen in the above table, Each of Disney's segments have increasing operating margins over the last three years except Disney's Interactive Media segment, which represents a paltry 2% of revenue. Furthermore, Disney's largest segment, Media Networks, has contributed incrementally more per dollar in each of the last three years than any other segment. These trends all point toward superior pricing power.

Compared to three of its peers, Dreamworks (NASDAQ: DWA), CBS (NYSE: CBS), and Time Warner (NYSE: TWX), Disney now has the highest overall operating margin.

<img src="http://media.ycharts.com/charts/4c8dd0666232055dae8fadc0e6898129.png" />

DIS Operating Margin TTM data by YCharts

Pricing Power Isn't Cheap

This pricing power across all four of Disney's main operating segments doesn't come cheap. Disney trades at a premium price to its peers by most valuation metrics (see table below). Time Warner, however, comes close (depending on how much weight you give to each valuation metric).

<img src="/media/images/user_13783/disney-valuation-peers_large.png" />

The Bottom Line

With increasing operating profits and increasing operating margins across each of Disney's main business segments, there is clear evidence of pricing power at the Disney empire. Disney's powerful pricing power, however, can't be purchased cheaply. But with operating margins increasing so significantly, especially in Disney's largest and most profitable Media Networks segment, investors might consider paying a premium price for Disney's stock in order take ownership in a solid investment for the long haul.


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 DreamWorks Animation. 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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