The Best Value in Entertainment
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the entertainment industry, though there are many strong competitors, a household name seems to lead the pack. Walt Disney (NYSE: DIS), though well-known, offers investors not only strong future earnings growth, but also the potential for higher dividends as well. Though the company has been around for many years, there are several factors that seem to be lining up to boost Disney's results in the future. Looking at the company's most recent earnings report, investors can see some of the positive factors already beginning to play out.
Walt Disney certainly faces its share of competition depending on which division you look at. The company's Media Networks division is comprised of their popular ESPN, ABC, and Disney channels. This unit competes directly with companies like Time Warner (NYSE: TWX) and News Corp. (NASDAQ: NWS). These two companies operate television stations such as TNT, TBS, HBO, and Fox. Fox, which is owned by News Corp., seems to offer consistent quality programming. Time Warner's HBO channel is seen by some as a leader in cable television, but Disney's channel lineup is equally competitive. In the current quarter, this division saw revenues increased 3% and income was up 2%. It's very likely that the weakness in this division is temporary, as the strength of the ESPN network is really shown during football season. Investors considering Walt Disney should be primarily focused on the company's Parks and Resorts as well as their Studio Entertainment business.
If the economy continues to recover, which I believe it will, Disney's Parks and Resorts division should benefit. You can already see the increased activity in the last quarter, with revenues up 9% and income increasing 21%. This improvement was broad-based with increases at the company's domestic theme parks, Tokyo Disney, and the Disney Cruise line. With an improved economy, the company's Studio Entertainment division should also see particular strength. While the current quarter showed impressive income growth up over 500%, what investors should primarily be concerned about is future film releases. In the next year or so, Disney should benefit from sequels to popular franchises such as: Iron Man, Thor, and Pirates of the Caribbean. In addition, the company is planning sequels to Monsters, Inc. and the last Phineas and Ferb movie. This strong release schedule should appeal to both adults and kids and help drive bottom line results. In a small way, these releases should also help the company's Consumer Products division sell more toys and games based on these franchises. While the company's consumer facing divisions each showed relatively impressive results, what was really amazing was the company's financial statements.
With overall revenues up 4% and diluted EPS up 31%, Walt Disney's current quarter already looks fairly good. However, when you realize that operating cash flow jumped 58%, and free cash flow was up 94%, the quarter looks amazing. Disney has used its free cash flow in the past to repurchase shares, and its diluted share count is down nearly 5% versus last year. The company's cash flow generating capability is probably the best argument for investing in Disney versus their competition.
While Time Warner pays a better dividend at about 2.5%, and News Corp. is expected to grow faster at nearly 19%, neither company can compete with Disney's cash flow generation. In fact, investors looking at Time Warner should be careful betting on their dividend as the company's free cash flow payout ratio has been hovering around 100% over the last year or so. While Disney's yield of 1.2% doesn't look particularly impressive, the company's massive cash flow should give investors confidence that this yield will rise over time. With analysts calling for 12.5% EPS growth, I believe the company may do better. While we are going into a slower part of the season for the company's Parks and Resorts division, Disney's Media Networks should pick up part of the slack as the football season kicks into high gear. Next year has the chance to be a very good year for Walt Disney. An improved economy would boost results at not only Parks and Resorts, and the company's strong movie lineup should contribute positively to strong growth. With the stock selling for about 16 times forward estimates, long-term investors have a chance to acquire a part of the “Mouse House” at a reasonable price today. With the stock selling at a reasonable price, and strong growth on the horizon, this could be the best value in entertainment.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.