What does Star Wars Have in Store for this Entertainment Giant?

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

Disney has achieved success across all its business lines in the past few years, from its theme Parks and Resorts to Studio Entertainment. The company has picked one of the world's best franchisee (Lucasfilm) in order to increase its existing portfolio of recognized brands like Walt Disney, ABC Family, ESPN and Marvel Entertainment. Disney is all set with new cinematic launches, like Avengers 2 and Stars Wars VII, scheduled in 2015, which also pose a threat to Time Warner’s launch of Justice League of America.

If we undertake a comparative analysis, we find that Disney’s forward P/E of 15.07x for the last 12 months is lower than the industry average of 16.95x. 

<table> <tbody> <tr> <td> <p><strong> Company</strong></p> </td> <td> <p><strong>Revenue</strong></p> </td> <td> <p><strong>EPS</strong></p> </td> </tr> <tr> <td> <p><strong>Walt Disney <span class="ticker" data-id="203310">(NYSE: <a href="http://caps.fool.com/Ticker/DIS.aspx">DIS</a>)</span></strong></p> </td> <td> <p>42.28B</p> </td> <td> <p>3.13</p> </td> </tr> <tr> <td> <p><strong>News Corp. <span class="ticker" data-id="204780">(NASDAQ: NWS)</span></strong></p> </td> <td> <p>33.88B</p> </td> <td> <p>1.09</p> </td> </tr> <tr> <td> <p><strong>Time Warner Inc. <span class="ticker" data-id="205832">(NYSE: <a href="http://caps.fool.com/Ticker/TWX.aspx">TWX</a>)</span></strong></p> </td> <td> <p>28.76B</p> </td> <td> <p>2.66</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

News Corp was able to post net income of $2.23 billion in 1Q 2013, which was primarily based on its sale of NDS group to Cisco and its strong performance in cable channels segment. However, its publishing segment showed profit of only $57 million against $110 million year over year. Coming over to Time Warner, the company lost a net 140,000 cable TV customers in 3Q 2012, which resulted in lower revenue growth of only 9% to $5.36 billion from $4.91 billion year over year. Although it’s Warner Bro Studio showed good performance with “The Dark Knight Rises” in 3Q 2012, but it couldn’t repeat the success of Harry Potter, which was a blockbuster in same quarter year ago.

With the thrust of financial and fundamental factors backing it, Disney’s position looks strong for the long haul. Let us examine these factors one by one.

Lucasfilm Acquisition

Disney has acquired Lucasfilm, home of the Star Wars franchise, for $4.05 billion. This acquisition will further expand Disney’s portfolio of world class content, strengthening its position and further fueling its creative engine. It will also provide the company with the opportunity to leverage the launch of Stars Wars VII (in 2015) in its theme parks. From an  earnings perspective, Lucasfilm is currently generating $600 million to $700 million a year and it is expected to bring in $800 million in revenue per year in the future. Disney has seen success in the past with its Pixar Animation Studios Inc. in 2006 and Marvel Entertainment Inc. in 2009. It seems that Disney's strategic acquisition of Lucasfilm will dominate the mass entertainment field for years to come.

Parks & Resort Business Investment

Disney's revenue from the Parks & Resorts segment rose ~19% in 4Q 2012, reflecting higher revenue from domestic Parks & Resorts. The new Cruise Ship launched in Hong Kong and new Cars Land in California increased its consumer traffic, resulting in a 3% jump in domestic footfalls. With this growth Disney remains focused on theme parks and are making further investment of ~$500 million in this sector in 2013. The main highlights of its new additions include "Be Our Guest," a Beauty and the Beast themed French restaurant that will be the first venue to serve alcohol in theme parks. Moreover, Disney's amusement park in Orlando, Florida is going under renovation, and will attract more tourists during the high traffic holiday season after the renovation. This capital deployment will enhance its market and create a long term growth opportunity for the company

Increasing Geographical Footprint

Continuing with its development track, Disney is looking forward to expand its global footprint in developing countries like China, Russia, and India. It has opened an over-the-air Disney Channel in Russia to boost its presence there. For the China market, Disney is building the Shanghai Disney Resort, which includes Shanghai Disneyland, two themed hotels, and a retail dining and entertainment venue that is targeted to open by the end of 2015. In addition to this, Disney has acquired a 50% stake in UTV, which will position it well in respect to movie offerings and enhance its market in India.

Disney's strategic initiatives make it a good investment opportunity. Its leading media network ESPN is bound to see continued success in 4Q 2012, as it remains an all-time favorite channel for sports lovers. The company has exclusive sporting coverage licenses with some of the top sporting leagues, which give it a record number of viewers. Disney’s long term growth assets such as Lucasfilm Acquisition and investment in Parks and Resorts have raised the EPS estimate of the company for 2014 ($3.82 to $3.83), reflecting a 16% growth and for 2015 $4.33 (13% growth). Furthermore, the company's cash by operations in 2012 increased 14% to $8.0 billion as compared to 2011, representing a strong balance sheet which opens up new acquisition avenues. Its Free Cash Flow increased to ~$4.18 billion versus $3.44 billion last year, which will be utilized for share repurchase of ~$3.2 billion in FY 2013 compared to ~$3.0 billion in FY 2012. Thus, in my view, Disney is a must buy.


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Time Warner. 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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