Should You Buy This Media Conglomerate?

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

It’s been a great 2013 for Walt Disney (NYSE: DIS) shareholders, who have seen the stock rise 35% since the beginning of the year. With returns like that, you’d likely think that the house that Mickey Mouse built can do no wrong.

At the same time, the company's investing case isn't as sparkling clean as investors may prefer, as the media giant is likely to take a bath on one of the year’s biggest movie flops.

With all this in mind, there’s one question left to answer: is Disney still a great stock to buy?

A true media empire

It’s no exaggeration to say that Disney is truly a media juggernaut. Disney is a Dow Jones Industrial Average component and holds a $120 billion value by market capitalization.

The company operates in five segments, including Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive.

Not surprisingly, the company’s Media Networks segment is where Disney derives most of its business. This segment accounts for nearly half of Disney’s revenue all by itself.

Media Networks is where Disney’s powerhouse television entities reside, which include ESPN, A&E Television Networks, ABC, and the Disney Channels.

This segment has posted strong results to begin the year. Revenue is up 6% through the first nine months of the year, and Disney’s impressive numbers don’t end there. The company’s second biggest segment by revenue, Parks and Resorts, has posted 9% revenue growth through the first three quarters, year over year.

A crack in Mickey Mouse’s armor

The one blemish on Disney’s resume in the most recent quarter was its Studio Entertainment division, which saw revenue decline 2% and operating income fall 36% when compared to the same quarter last year.

The reason for this is the relatively tepid response to the company’s blockbuster film Iron Man 3, which did well in its own right, but failed to match the spectacular success of last year’s hit movie, The Avengers.

Of concern for shareholders now is the fact that things in the Studio Entertainment division aren’t expected to get better in the current quarter. The Lone Ranger was an unmitigated disaster, and it’s going to cost Disney big.

All told, the company expects to lose between $160 million and $190 million on the expensive summer movie bomb, which Disney will incur in the next quarter.

It’s for this reason that Disney fell in after-hours trading upon releasing quarterly results, although the drop was relatively modest.

A true powerhouse, but perhaps not the best media stock?

Disney is, without question, the industry leader in terms of size and brand recognition. That being said, Disney is not without competitors, and there may actually be better stocks to buy in the space.

Viacom (NASDAQ: VIAB) is a $37 billion company by market value, which operates various television networks including Comedy Central, Nickelodeon, MTV, VH1, and Spike. The company also holds a Filmed Entertainment segment under the Paramount Pictures brand.

Viacom recently released extremely strong third-quarter results. The numbers were excellent across the board. Revenue rose 14% year over year, and adjusted diluted earnings per share soared 33% versus the same quarter last year.

The company saw strength in both its Media Networks and Filmed Entertainment segments, pointing to the success of Star Trek Into Darkness and World War Z.

At the same time, there’s reason to think Viacom’s blowout results may have been a one-quarter phenomenon.

Taking a broader view, Viacom's total revenue and operating income are actually both down 4% through the first nine months of 2013.

Meanwhile, close competitor Discovery Communications (NASDAQ: DISCA) recently posted great results in both its fiscal second quarter and fiscal first half.

Total revenues was up 30% in the second quarter and 19% over the first six months. Ditto for the company’s adjusted operating income before depreciation and amortization, which was up 23% and 11% in the second quarter and first half of 2013, respectively.

At the same time, investors are paying a steep price for Discovery's growth. At current prices, new investors are paying 30 times trailing earnings for Discovery. Disney, meanwhile, trades at a much more reasonable 20 times trailing EPS.

Going forward, the picture remains the same. Discovery trades for 20 times forward earnings, a 25% premium to the 16 forward P/E multiple Disney holds.

And, Discovery does not pay a dividend, so shareholders aren't receiving future downside protection that regular income can provide. Disney, meanwhile, yields more than 1% at recent prices.

In the end, Disney is simply the leader of the industry. The company’s growth numbers might not leap off the page for potential investors, but that’s to be expected from a company as large and mature as Disney.

Practically speaking, Disney is still growing at satisfactory rates and owns a slew of extremely valuable assets that is hard to match. Viacom and Discovery are both strong companies and highly profitable businesses, and their own investors will likely do well in the future.

However, there’s no matching Disney’s blend of juggernaut brands. For long-term investors, Disney is the best bet among the diversified entertainment stocks.

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Robert Ciura 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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