Disney Is a Buy on the Sell-Off

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

The recent sell-off of Disney (NYSE: DIS) stock has largely been attributable to analyst downgrades on rising competition. Investors have become fearful that the company will face increased competition from News Corp's (NASDAQ: NWS) Fox Sports 1 launch in August, which will step up the competition on one of Disney's most lucrative properties, ESPN.

Rising Competition

In recent years, ESPN, which is a part of Disney's Cable Networks segment, has driven the lion's share of the company's operating income, contributing up to 69% of Disney's total operating income. While the threat of Fox Sports 1 is a rather strong one, ESPN has a supreme position in both TV and Internet viewing from mobile devices, which will translate into years of strong earnings growth and bargaining leverage for the company. 

ESPN is very well positioned to capitalize on secular consumer trends, as it has a very strong foothold on mobile apps. However, the unveiling of Fox Sports 1 by News Corp's 21st Century Fox does represent a newly emerging threat to Disney's cash cow. The entire TV Networks business is performing strongly as a whole, as they are able to get paid more for their content, and they have leverage in negotiating for their TV rights business with advertisers.

And Fox Sports 1 will almost certainly be competing directly with ESPN for the broadcast of live sports programming including college sports. That increased competition might drive up programming costs for ESPN for some of the most lucrative sports contracts, which will cut into its operating margins. As a result, ESPN’s will face increased competition for affiliate fees and high-priced ad sales, but ESPN already has a massive installed user base, which Fox Sports 1 currently doesn’t.

Parks and Resorts are performing well

Disney's amusement parks have been attracting millions of guest who are opening up their wallets. In the last quarter, revenues from Disney's amusement parks across the globe increased 14% on a Y/Y basis and stood at $3.3 billion, and the operating income surged 73% to $373 million.  The company's domestic resorts and the fantasy cruise ship are doing very well, and bringing in large crowds.  

The average guest spending increased as Disney pushed for price increases on tickets, food, merchandise and hotel rates. Disney's International resorts, especially the ones in Paris and Hong Kong, benefited from higher attendance levels as well as more guest spending. Disney does face decent exposure to consumer spending in its Parks and Resorts division, as the entertainment spending by consumers are rather discretionary and tied to economic cycles. 

As GDP growth ticks up across the globe, including the U.S., Disney will be a beneficiary. The company's broad and diverse exposure to consumer entertainment resorts across numerous growing regions positions the company's iconic resorts to pull in larger crowds, while providing the company the ability to increase prices. The company made massive investments on infrastructure across its parks to capitalize on economic growth and increased consumer spending.

Good slate of movies; Massive portfolio of media assets

Disney's acquisition spree over the years has led to the company owning some of the most lucrative entertainment properties in the world. The company's Iron Man 3 broke records in the international market with its opening. The company has a strong slate of movies from its iconic studios coming up in the next few months. The range of entertainment options coming from Marvel, Lucasfilm and Pixar will pretty much dominate the box office.

And the company's growing reach in Asian markets including China will enable the company to not only generate more revenues from movies but also lays the foundation for more incremental sales. The company's movie slate will not only captivate audiences but will generate more merchandise sales and drive bigger crowds to its amusement parks in the U.S., Europe and in Asia. The company's Star Wars franchise will almost certainly be a mega-hit in the box office. And the company took a shrewd decision by licensing off the rights to the best in class game publisher, Electronic Arts (NASDAQ: EA).

Electronic Arts will soon be rolling out the first video game in the Star Wars line, Star Wars: Battlefront. Disney did a great job of closing down the gaming unit, LucasArts, and pursuing the alternative path of licensing through Electronic Arts. Disney's decision enables the company to take a higher margin route, and pushes the risk of selling the games on Electronic Arts. But almost certainly Electronic Arts will roll out a fantastic video game, due to its long proven track record.

And Disney is gearing up to launch the Star Wars 7 flick in 2015 through Lucasfilm. The Star Wars intellectual property alone can translate into billions of dollars of incremental revenue in only a few years, which will pay for the acquisition price of $4.05 billion by itself, which Disney laid out in October 2012. 

Solid footing across the board

Disney has been a household entertainment icon for generations across not only the U.S. but across the globe. The company's portfolio of media assets will translate into billions of dollars of incremental revenues. Disney has a solid footing to capitalize on global economic growth and incremental consumer spending. ESPN remains a clear leader in sports entertainment, and will be maintaining its user eyeballs.

The company's position in consumer mind-share can be extracted from the company's social media presence. Disney has roughly 44.6 million likes on Facebook, according to PageData, which is a fantastic feat for any brand. The company's high quality content and entertainment portfolio will drive Disney's bottom line growth for years. The recent sell-off represents a great entry point for buying into Disney stock. 

It's easy to forget that Walt Disney is more than just the House of Mouse. From its vast catalog of characters to its monster collection of media networks, much of Disney’s allure for investors lies in its diversity, and The Motley Fool's premium research report lays out the case for investing in Disney today. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. So don't miss out -- simply click here now to claim your copy today.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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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