Despite Film Division Debacle, Disney Shines
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Disney's (NYSE: DIS) crew seems to have pulled out its wands once again, as the corporation trades up nearly 2% following the conjuring of another magical performance in the second quarter. Total company revenues and net profits were up 6% and 21%, respectively, compared to the same quarter in 2011, and the performance was boosted with strong gains across all of Disney’s segments.
Significant operating efficiency gains were also posted, and operating margins in Media Networks, Parks, and the Interactive segments expanded 160, 210, and a whopping 3000+ basis points, respectively. Q2 marks the sixth consecutive quarter that revenues and operating profits have increased (on a four quarter run basis), and even with the stock up more than 15% year-to-date, there are still several meaningful catalysts for future growth.
Studio Growth
One hardly needs a recap of the astounding performance of The Avengers, which topped the previous opening weekend box office record and has brought in more than $700 million in worldwide ticket sales within two weeks of its release. Disney’s $4 billion purchase of Marvel Entertainment in 2009 presents one of the most important catalysts for the segment going forward, even if Marvel’s distribution rights with Paramount and Sony (NYSE: SNE) Pictures have yet to expire.
One of the most exciting (although certainly expected) news tidbits from the corporation’s earnings release was the announcement of a sequel to The Avengers, which is already in pre-production. And, in full Disney style, the corporation will continue to capitalize on the popularity of the film with full integration into its other operating segments. Company management has highlighted that theme park rides, consumer merchandise, and a future integration with its Pixar animation unit are all in the works.
The announcement highlights one of the greatest strengths that Disney presents to its investors. Due to its high diversification, a slip up in either of its “test segments” (Studio Entertainment and Interactive) does not have a crippling effect on system-wide earnings. Although no one is begging for another John Carter debacle, the $84 million lost in the Studio Entertainment division in Q2 was rather trivial (in the long run) compared to the meaningful cumulative improvements posted in its other segments. Whereas a slip in the film department will present a slight downside to the entire enterprise, a blockbuster hit like The Avengers has a disproportionate upside potential due to residual impact on other operating divisions. The $700 million top line generated from the film, therefore, is just the tip of the iceberg.
Parks Growth
There is unlikely to be a better barometer of the state of consumer confidence than the number of quarterly trips that are booked at Walt Disney World theme parks. The recent performance in the parks division – trailing twelve-month revenues of $12.4 billion are 16% greater than their mid-recession lows – shows that consumers are more willing, and able, to spend discretionary dollars. The higher operating income generated at domestic parks and resorts was driven by increased attendance and spending per guest, which in turn was driven by successful price hikes in ticket prices, hotel rates, and food/beverage/merchandise spending. Disney’s existing parks and resorts are, well, what they are – the corporation will continue to generate strong “same store sales” growth as consumer confidence and spending strengthens.
One of the most exciting catalysts in the parks division is the development of the Shanghai Disney Resort, which is scheduled to open within the next three years. The recent stronger than average results in the Hong Kong and Tokyo parks shed a positive light on the potential of Disney’s third Asia-based park.
Worth The Premium?
Investors do realize that a Disney investment is a longer-term play on consumer spending habits. Although widely diversified in several exciting markets, the entertainment provider is not destined for explosive growth over the mid-term – it is, instead, built to eke out incremental gains as the quarters progress. Short term and more frequent catalysts including The Avengers-like film releases may provide an exciting halo around Disney stock, but in terms of meaningful per share earnings gains, the releases tend to achieve their full potential over the long run through integration with merchandise, parks, and subsequent film/TV program launches.
This being said, however, Disney does tend to command a price premium relative to other players in the entertainment/media field due to its business diversification and transparent earnings visibility.
- P/E TTM
- Forward P/E (2013 Earnings Estimates)
- Disney: 13.26
- CBS: 11.71
- Viacom: 9.38
- Time Warner: 9.83
- Price/Book
- Disney: 2.19
- CBS: 2.13
- Viacom: 3.19
- Time Warner: 1.15
- Dividend Yield
- Disney: 1.30%
- CBS: 1.20%
- Viacom: 2.10%
- Time Warner: 2.90%
Although substantial per share price appreciation is unlikely to be on Disney’s near term horizon, the longer-term catalysts that exist in all of the corporation’s divisions will push it to grow into its current valuation. As such, due to the premium that Disney currently commands (and historically has commanded), the stock will naturally experience slow and manageable growth supplemented with dividend payouts, making a relatively attractive long term pick for the passive investor.
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