A SWOT Analysis of Walt Disney

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A SWOT (Strengths, Weaknesses, Opportunities, Threats) overview can be useful in determining whether a company is a worthwhile investment. Walt Disney (NYSE: DIS) had a solid year in its fiscal 2012 (ended in September), growing per-share earnings 21%. The shares followed suit, climbing nearly 30% in calendar 2012. We will take a look at what drove the improved showing, what we anticipate in terms of internal initiatives, and what actions by its competition are likely to be consequential.

Strengths

ESPN and other Cable Networks

Cable television remains a growing and highly lucrative sector within the entertainment landscape and Disney owns the perennially most-watched network in ESPN. In addition to the healthy advertising revenues this attracts, Disney has the leverage to boost affiliate contract rates significantly. As a result, operating income has increased nicely at ESPN, as well as Disney’s other wholly-owned networks, Disney Channel and ABC Family.

Investments in Parks and Resorts panning out

Disney usually, and particularly within the past several years, spends heavily to upgrade and build vacation properties. In fact, related capital expenditures were $2.9 billion in fiscal 2012. Along with rising guest spending and attendance at its U.S.-based resorts, profits are benefiting from strength at newer operations including cruise lines, Hong Kong Disneyland and Aulani resort in Hawaii. New attractions should continue to keep the theme parks’ visitation increasing.

Returning cash to shareholders

After spending for the parks, Disney had enough cash left to repurchase about 4% of outstanding shares and pay a $0.60 per share dividend, amounting to a modest yield. The enormous cash flows brought in by Disney’s Media businesses facilitate these measures.

Weaknesses

The ABC broadcast network

Traditional broadcast TV, in general, is giving way to cable and other new forms of media. ABC, specifically, is currently trending third among its peers, behind CBS (NYSE: CBS) and Comcast’s (NASDAQ: CMCSA) NBC, and its ratings are falling on a year-over-year basis.

CBS consistently tops the ratings chart, thanks to numerous popular primetime programs such as NCIS. The company overall is faring well, as earnings are also benefiting from a burgeoning cable TV unit. Its positive momentum approaching 2013 adds appeal to CBS shares.

Declining DVD market

Disney’s Home Entertainment revenues declined 9% in fiscal 2012. Still a large and wide-margined business for Disney, the ongoing slowdown stems from the rollout of low-priced DVD rental kiosks and alternative media outlets. Home Entertainment, for reference, contributed only 5% of total revenue in 2012, though.

Opportunities

Lucasfilm

Disney paid $4 billion to purchase Lucasfilm, approximately the same amount it shelled out for Marvel at the end of 2009. The Marvel purchase has spurred a slew of films, many high grossing, including 2012’s top box office earner, The Avengers. Lucasfilm is certain to encourage the creation of further such blockbusters, with Star Wars: Episode 7 slated for 2015 followed by a sequel every two or three years. The integration should also support growth in Disney’s consumer products segment through the marketing of acquired characters.

International cable

ESPN and the Disney Channels are already available across the globe. Indeed, ESPN operates 27 international sports networks spanning 190 nations and 11 languages, while Disney Channel is available in 35 languages. The potential for profit expansion may well be considerable, nevertheless.

On that note, each of Disney’s major business lines has overseas possibilities. The recent buyout of UTV Software Communications should allow it to gain a presence in India’s film industry. Plus, it is in the process of developing Shanghai Disney Resort, on tap for 2015.

Threats

New Media

Disney, like other entertainment conglomerates, has been unprofitable with its Interactive assets and, in fact, downsized its video game operation to some degree. Yet, games and interactive websites are apt to capture an incremental share of consumers’ attention. While Disney should effectively broadcast its programming online, its interactive businesses could well struggle persistently. Exclusive deals for film streaming, such as the recent agreement with Netflix, help to broaden distribution through these channels somewhat, however.

Viacom's upstart animation studio

Disney counts on gaining a large proportion of the young audience partly through its often very well-received animated films. Viacom (NASDAQ: VIA), owner of Paramount, is exiting its distribution arrangement with DreamWorks Animation and plans to launch an internal animated studio in 2014. The first film, The SpongeBob SquarePants Movie 2, is scheduled for that year. Viacom has access to characters through its Nickelodeon unit and should thus gain on Disney a bit. That said, its previous forays into full-length animation, namely Rango in 2011, have been lukewarm and Disney should still have a sizable edge.

SWOT summary

In all, Disney is reliant on healthy profitability from its cable TV and theme park/resort businesses, two units where results have been improving. Its film unit is dependent on timing of releases and a quality slate. Management should take the correct initiatives to keep earnings on the upturn over the long run. DIS stock may well therefore be a good buy and hold selection.

 

 




dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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