Should You Buy This Media 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.

2012 was a great year for The Walt Disney Company (NYSE: DIS), as the company's shares grew more than 30%,  driven by ESPN's strong performance, the Disney channel, and a rapid recovery in its parks and resorts, which reported higher consumer attendance. Though the overall revenue wasn't splendid, the company managed to show an improvement in its profitability as the margins increased across all the business segments. I expect that for 2013 the company will be able to replicate the same successes it saw in 2012 with brands such as ESPN and Disney Parks and Resorts.

Disney remains confident about the success of its media network ESPN, which is expected to contribute around $11 billion revenue to the company in its earnings for FY12. This channel has a whopping 100 million subscribers in the United States and the company charges $5 a month per subscriber, which is the second highest carriage fees in the pay TV industry after HBO. Moreover, ESPN also has more than one million average daily viewership.

The Deal

Adding a spark to the current success, Disney entered into a multi-year agreement with Netflix , in which Netflix will be acquiring exclusive U.S. TV rights for movies from Disney starting in 2016.  With this agreement the high-profile Disney direct-to-video new releases will also be available on Netflix. On the other hand a separate catalogue deal has also been made by both the companies under which Disney's classic movies like Alice in Wonderland and Dumbo will be beamed on Netflix.

Netflix grabbed this deal and became a direct competitor to HBO, Starz, and Showtime. Netflix’s shares jumped almost 14% after the announcement of this deal. As Starz’s deal with Disney will be expiring in 2015, it will give Netflix a good start by bringing its subscribers high quality and popular films. Netflix subscribers will be enjoying some of the biggest box office hits of the year. With more than 30 million subscribers, Netflix has already gained a lead over Amazon by capturing 33% of the prime time web viewing on internet traffic. By charging only $7.99 per month for unlimited Internet streaming access to its movies and TV shows, it is taking almost half of what its competitor HBO charges. 

Benefits to Disney

With this deal Disney has become the first major studio to bypass the traditional cable TV outlet to push its films after their theatrical release. Financially this deal will have a positive impact on Disney, as it is estimated that the company will be receiving ~$300 million annually for the next three years for the library rights, as well as the film output deal, respectively. The library rights are 20% higher when compared to its present agreement with Starz, which was earning it $250 million per year. This extra money will help Disney to compensate for the huge amount of money which it had spent on its Lucasfilm acquisition for the Star War franchise for $4.5 billion. Star Wars will be combined with Disney's creative content across many platforms, creating significant value for Disney.

Losing Tyler Perry

On the other hand, Disney’s close competitor Time Warner Inc. (NYSE: TWX) lost its deal with Tyler Perry, whose three blockbuster series used to run on TBS, a Time Warner's channel. These shows have seen great success and earned Time Warner huge revenue in the past. But this doesn't make me lose my confidence in the company's growth potential. Its Film Entertainment segment accounts for 50% of its revenue. The release of “The Hobbit” in the fourth quarter generated ~$500 million all across the world, and the release of “The Dark Knight” certainly didn't hurt earnings. Warner Bros will be introducing 25 new series for 2013 under its Television segment, giving it a lead in broadcast programming. As for its Subscription Video on Demand segment, the company has made ~$250 million worth of deals in this segment.

The Foolish Bottom Line

I feel that Disney has huge room to grow, and all it needs is to make more strategic acquisitions like it did in the past. The Lucasfilm acquisition is estimated to bring $800 million of revenue annually. ESPN, which is a 45% contributor to Disney's value, will also keep its momentum. Considering these factors, I feel Disney provides a good investment opportunity.

ShwetaDubey 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!

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