The House of Mouse Always Wins

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

When my fellow investors ask me what my favorite long-term holding is, I never hesitate to tell them that it’s The Walt Disney Company (NYSE: DIS). In my opinion, Disney is an exceptional stock hidden in plain view, with rock solid business segments that are able to weather severe economic downturns while flourishing in times of prosperity.

Nearly half of Disney’s revenue is generated by its media networks, such as ESPN, and another third is brought in by its incomparable theme parks. Meanwhile, it also owns exciting properties such as Pixar, Marvel and Lucasfilm, which make it the largest force in entertainment on this planet.

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Solid second quarter growth

Therefore, it came as no surprise when Disney soundly beat Wall Street estimates with robust second quarter earnings. Disney’s net income rose 32% year-on-year to $1.5 billion during the second quarter. On a per share basis, Disney earned $0.83 per share, beating the analyst estimate by six cents. Revenue rose 10% to $10.6 billion, also topping the $10.5 billion that analysts had been expecting.

Mickey’s media empire

Disney’s media segment, which includes ESPN and ABC, reported a 6% gain in sales to nearly $5 billion. On this front, the company competes with other media behemoths such as Time Warner (NYSE: TWX), CBS, Viacom, Comcast and News Corp.

In this industry, Disney’s toughest competitor is Time Warner, which owns HBO, the Turner Networks (CNN, Cartoon Network, TNT, TBS), and the broadcast rights to NCAA games. However, Time Warner fared far worse than Disney during its recently reported first quarter results, with flat revenue growth from the prior year quarter at $6.9 billion.

That $6.9 billion figure includes Time Warner’s film, television, and publishing segments. Although Time Warner reported growth in its film and television businesses, losses in its ailing publishing segment offset those gains. This means that if Time Warner can’t find a way to start growing its top line again, Disney’s media segment could actually generate more sales than all of Time Warner combined.

Despite its impressive top line growth, Disney’s ABC network reported a decline in advertising revenue as a result of lower rated programs. However, CEO Bob Iger stated that he was “reasonably bullish” regarding advertising growth for the rest of fiscal 2013.

Mickey’s parks and resorts

Revenue at Disney’s parks and resorts, which now include its cruise lines, rose 14% to $3.3 billion. Disney operates theme parks in California, Florida, France, Japan and China. The company reported that higher guest spending and more hotel bookings, fueled by the launch of the Disney Fantasy cruise ship, contributed to its strong top line growth. Operating income at the segment also rose 72.5% to $383 million.

Looking ahead, Disney’s upcoming Shanghai Disney Resort, which will be three times the size of Hong Kong Disneyland, is expected to significantly increase revenue for its parks and resorts segment. Shanghai Disney is expected to open in December 2015.

Mickey’s movies

Disney’s Studio Entertainment division reported 13% revenue growth to $1.3 billion, thanks to the success of films such as Oz: The Great and Powerful and Wreck-it Ralph. Disney’s strong box office performance during the quarter shows that it has learned from past blunders such as Mars Needs Moms and John Carter. The studio division’s third quarter looks rosy as well, with Iron Man 3 having already grossed over $700 million worldwide within its first week.

Disney’s Studios easily outperformed Time Warner’s Warner Brothers film division, which reported a 4% decline in revenue to $2.7 billion last quarter. Warner Brothers’ offerings during the quarter, Gangster Squad and Jack and the Giant Slayer came in “below expectations,” according to Time Warner CEO Jeffrey Bewkes. In the current quarter, Warner Brothers is hoping that The Great Gatsby and The Hangover Part III can help it post some positive top line growth, but both films pale in comparison to Disney’s Iron Man 3 and Pixar’s upcoming Monsters University, the sequel to Monsters, Inc.

Looking forward into the next few years, Disney has a lot of room to expand its Marvel movie universe, with sequels to Thor, Captain America and The Avengers all on the way. These films will generate a steady stream of studio revenue for Disney all the way up to the 2015 release of Star Wars Episode VII, a guaranteed blockbuster. If Episode VII is well received, then a new trilogy of Star Wars films will solidify Disney’s dominance over the movie making industry.

Enter Electronic Arts

Speaking of Star Wars, Disney recently signed an agreement with video game publisher Electronic Arts (NASDAQ: EA) to produce a new series of Star Wars video games.

When Disney acquired Lucasfilm last year, it shut down LucasArts, the latter’s video game arm. Disney’s reason for shutting down the game segment was obvious - since Disney’s own interactive games division never made a profit, exposing itself to more video game sales would be a poor strategy. However, partnering with Electronic Arts was a wise move, which now shoulders the risks of producing these games.

EA Labels president Frank Gibeau has stated that several of its core studios, such as DICE, Visceral Games and Bioware will develop Star Wars titles. Bioware, which also created EA’s best-selling Mass Effect series, already has previous experience creating Star Wars games - it created the popular 2003 role playing game Knights of the Old Republic as well as the 2011 massive multiplayer online game, The Old Republic.

The Foolish Bottom Line

Disney has all the magical characteristics of a perfect growth stock. The majority of its revenue is generated from three clearly defined business segments - media, parks, and movies - and each division has strong catalysts for long-term growth.

In media and movies, it is superior to Time Warner. In parks and resorts, it has no real competition. Competitors such as Six Flags and Comcast’s Universal Studios are far too small to impact Disney’s park attendance rates. Disney has also cleverly shifted most of its movie studio business over to its subsidiaries Pixar, Marvel and Lucasfilm, which produce far more successful products than its own in-house studio. Lastly, it is smartly downsizing non-profitable segments, like its interactive games division.

Although the stock is currently near all-time highs with a slightly overheated trailing P/E of 21 (compared to the industry average of 18.5), I believe that Disney will continue to grow over the next five years, making it a great, safe stock to buy and hold.

It’s easy to forget that Walt Disney is more than just the House of Mouse. True, Disney amusement parks around the world hosted more than 121 million guests in 2011. But 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.


Leo Sun owns shares of Walt Disney. 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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