This Entertainment Company Is Doing Better Than You May Think

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

Recently, while booking a trip to Walt Disney World for my family, I noticed a few things that led me to believe that the company is doing very well lately. Everything from theme park tickets to their hotels has gotten much more expensive in just the past few years, and other things such as dinner reservations have gotten harder to come by.

Now, I realize that this is far from “investment research,” but it got me thinking about Walt Disney (NYSE: DIS), which not only operates theme parks, but has a diverse range of revenue streams in its portfolio. Let’s take a deeper look at Disney and how it compares to the rest of its sector.

More than just Mickey Mouse

As one of the world’s largest and most recognizable entertainment conglomerates, Disney has operations in theme parks, TV, films, and merchandising. While it is no surprise to me that the company’s Theme Parks & Resorts segment (Disneyland, Disney World, Disney Cruise Line, etc.) produces a large portion of the company’s revenue (about 30%), what did surprise me was that merchandising and film entertainment are, by far, the smallest revenue sources for Disney, at a combined 22%. 

Almost half of Disney’s revenue is a result of its Media Networks segment, which includes not only the namesake Disney Channel, but also the ABC broadcast network, 10 TV stations, and its 80% stake in the ESPN networks. The film entertainment business includes the Disney, Touchstone, and Miramax brands, and the consumer products division includes all of Disney’s merchandise licensing, book publishing, video games, as well as the 350 Disney Store locations all over the world.

As an investment: Cheap or expensive?

What strikes me the most about Disney is the strength of its earnings growth. In fact, since 2009, the company’s earnings have steadily risen from $1.76 per share to this year’s projection of $3.46. Disney is expected to continue this strong growth, as revenue is projected to rise by about 7% annually over the next few years. Additionally, the company’s profit margins are expected to widen as a result of increased digital streaming video deals (very high profit), as well as cost savings in its theme park operations. During the 2011-2012 period, the company spent a great deal of money to improve its parks and resorts, and most of the individual projects have been completed, so now it’s time to reap the rewards.

So, Disney trades for 18.8 times this year’s expectations, which seems pretty reasonable considering the earnings growth that is expected as a result of higher revenue and wider margins. The consensus calls for Disney to earn $3.94 and $4.56 in 2014 and 2015, respectively, which represents year-over-year earnings growth of 13.8% and 15.7%, respectively. In my opinion, this certainly justifies the valuation, but let’s take a quick look at what else is out there before diving in.

Other choices: Time Warner and Viacom

Time Warner (NYSE: TWX) is another entertainment conglomerate, and is about half the size of Disney in terms of market cap. The company operates in three segments, the largest of which is Networks, which accounts for 48% of the total revenue and includes the CNN, HBO, TNT, and TBS networks, to name a few. Time Warner’s other large segment is Filmed Entertainment, which produces 41% of its revenue and includes the Warner Bros. and New Line Cinema studios and several valuable movie franchises like Harry Potter and Lord of the Rings. The Publishing segment makes up the other 11% of revenue and includes such magazines as Time, Sports Illustrated, and People.

As an investment, Time Warner appears to be a little cheaper than Disney, at 17.1 times this year’s earnings, which are projected to rise by 16% and 14.5% over the next two years. However, it is worth noting that Time Warner carries significantly more debt, of about $16 billion, more than twice that of Disney despite being a smaller company.

Another potential alternative is Viacom (NASDAQ: VIAB), which operates the MTV, Comedy Central, CMT, Spike, and other networks, as well as the Paramount movie studio. On the surface, Viacom looks to be the cheapest of the three at just 15.5 times this year’s earnings, which are projected to grow by 16.2% and 14.7% in 2014 and 2015, respectively. It is also perhaps the most risky of the three, and has the least amount of diversity within its revenue sources (just TV and movies). 

Another thing that concerns me about Viacom, and the list of the company's networks backs this up, is that it targets a relatively narrow (but attractive) demographic. All of the networks are oriented towards the 15-30 crowd, and after reading about the increasing difficulty in finding employment for high school graduates, this group's spending power could be on a decline. The other two companies definitely have much more diversification within their revenue streams.

Thoughts

While Disney is not the cheapest stock mentioned here, it does offer a lot to its shareholders in terms of diversity and financial strength. Disney reports its earnings on Tuesday, August 6, and I would be paying extra attention to any discussion about the company’s profit margins and whether they are expanding on schedule. Also, if my travel-booking experience is any indication, the parks are as full as ever, and a ticket now costs about 20% more than it did just two years ago, so I wouldn’t be surprised at all to see better numbers than analysts are expecting over the next several quarters.

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Matthew Frankel 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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