This Media Giant Can Do More Than its Peers
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As content owners increasingly become power brokers, few companies have the strength of Disney (NYSE: DIS). However, the benefits go well beyond selling valuable content to companies like Netflix (NASDAQ: NFLX).
The Internet has changed entire industries in a very short period of time. For example, the music industry was nearly destroyed. Now, however, it appears to be getting back on its feet, the most notable recent event being Apple signing a lucrative deal with Sony (NYSE: SNE) for access to the media giant's music library.
Sony was rumored to be the last major hold out to Apple's iTunes Radio service. Holding out, however, allowed Sony to demand, and get, more than twice the normal royalty rate for ads surrounding its content. This shows why hedge fund manager Daniel Loeb wants to see the company split in two to unlock the value of the content business.
Although Sony shares have jumped lately, the laggard consumer products division is still an issue holding back the shares. With a new version of the PlayStation game console coming out, however, the company could be on the cusp of at least stemming the decline. More aggressive investors interested in content should take a close look at the turnaround potential of Sony shares.
Video, however, is really where the content wars are heating up. Sony has plenty of video and will soon be renegotiating contracts for its content. That adds additional upside potential. However, one of the biggest players in content is Disney.
Disney not only owns its famous mouse and pals, but it has been bulking up by acquiring key brands like Marvel and Lucasfilm, which owns the Star Wars franchise. Add in ABC, ESPN, and Pixar and Disney looks like the juggernaut of media. Its content is so vital, that Netflix recently inked an exclusive deal with Disney.
That is a huge statement, because Netflix is looking to transition its business model. It wants to become something of an online television station, offering exclusive and desirable content. The Disney deal speaks volumes about both the resolve at Netflix and the value of what Disney has to offer. In fact, Netflix let a deal with Nickelodeon parent Viacom (NASDAQ: VIA) lapse because it is getting more selective in what it buys.
Content, however, is expensive. While the cost of entering new markets was one of the reasons for a nearly $4 drop in earnings between 2011 and 2012, increasing content costs were also in the mix. With a sky-high price, Netflix is priced for perfection. Investors should be wary of the changing content dynamics, particularly as Netflix looks to create more of its own shows. Conservative types should probably avoid the stock.
Disney has also been paying up for content. Marvel and Lucasfilm cost $4 billion each, for example. For Disney, however, that content can be spread out over a large base. Clearly, it will make more movies and television shows based on the two purchases and, thus, have more to sell to others. But any company could do that.
What other companies don't have is Disney's amusement assets. Disney already has a section of its Florida Disney World parks dedicated to Star Wars. Now there are rumors that a big Star Wars themed park expansion is in the cards. And the brand is perfect for the recent trend toward amusement parks creating different “worlds” within a park.
The best example is the Harry Potter themed section of Universal Orlando. The section recreates scenes from the popular book and movie series. That section helped the amusement park set an attendance record in the first year after it opened. While Harry Potter is big, Star Wars is one of the few concepts that is bigger. Done well, Disney could find this a huge customer draw. And it still hasn't done anything to integrate Marvel's collection of comic book characters into the parks.
Disney shares are never cheap, with good reason. For example, the top line grew every year over the last decade except in 2009. Earnings have traversed a similarly strong upward path. The dividend has been increased annually for years, as well. And, of course, it owns all of that great content.
An around 1.2% dividend yield and a price near all time highs makes this stock most appropriate for growth and momentum investors. However, it should be on everyone's watch list, just in case a broader market sell-off creates a buying opportunity.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and 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!