Disney’s Diversified Portfolio of Businesses
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fantasy is always better than reality. Reality consists of going to work, coming home, getting up and doing it all over again. Some people may have afternoon realities to contend with such as cleaning house, mowing the lawn, and taking care of children. For me a good escape into fantasy by watching good science fiction is always a welcome move. The good-versus-evil-save-the world drama that permeates science fiction and fantasy beats the humdrum of daily routine any day. It is simple.
This fantastic element is at the core of what made Walt Disney Co. (NYSE: DIS) a success. On October 16, 1923 Walt Disney signed a contract with M.J. Winkler to do a series of cartoons called “Alice Comedies.” This is the date that was considered the start of Walt Disney according to its website. Cartoons in those days were meant to bring smiles to children and make adults laugh, in other words, a break from reality. Over time the public was introduced to iconic characters such as Goofy, Mickey and Minnie Mouse, and Donald Duck.
Strategic Portfolio
When Robert Iger took over in 2005 he realized he needed fresh content and characters to complement the traditional portfolio of characters. In 2006 Disney purchased Pixar which produced iconic movies such as Toy Story and Cars. In 2009 Disney purchased Marvel Entertainment, Inc. the maker of comic books and blockbuster hits like The Avengers. Both of these companies produce family oriented entertainment which I think is a good quality for Disney. I don’t see a lot of people buying toys based on Lions Gate’s (NYSE: LGF) Saw. Saw, in my opinion, is nerve racking. Lions Gate’s Hunger Games while an interesting science fiction movie and #2 behind The Avengers gives the audience a depressing view of a world where people are randomly selected to compete with people from rival districts for survival. This is good versus good. Marvel comics are comprised of a universe of characters that fight good and evil. Pixar provides light hearted cartoons that entertain kids. Pixar and Marvel are both fantasy factories that can churn out movies based on new or old characters and subsequent merchandise based on the movies.
The Five Pillars of Modern Disney
I think another strength that will drive Disney far into the future is Disney’s “diversified” portfolio of businesses. Disney is broken down into 5 revenue segments: Media Networks, Parks and Recreation, Studio Entertainment, Consumer Products, and Interactive Media. Media Networks is the television aspect of Disney such as ESPN, Disney Channel, and ABC. Parks and Recreation is comprised of Disney’s theme parks. Studio Entertainment produces movies such as the blockbuster The Avengers. Consumer Products produces toys and gadgets based on Disney properties. Interactive Media includes games and websites. These revenue segments provide multiple channels in which to leverage a product. The Avengers which started as a Marvel comic book became a top blockbuster hit for 2012 with U.S. box office sales of $603 Million in 2012 as of 07/01/12. This increases awareness of their comic books and toys thus driving revenue in the consumer products division. Disney could also leverage Marvel characters in future theme parks. Also the diversity of Disney’s underlying businesses makes up for shortfalls from flops such as the John Carter movie. Other companies such as Cedar Fair, L.P. (NYSE: FUN) have to live or die by theme parks alone with little diversity. Cedar Fair has added to its collection of theme parks in recent years such as Carowinds and King’s Island and I still don’t see very many toys or movies or characters being produced by their staff. They are essentially roller coaster specialists.
|
Disney Revenue Statistics |
||
|
Segment |
Percentage of Revenue |
*CAGR Past 3 Years |
|
Media Networks |
46% |
7% |
|
Parks and Resorts |
29% |
5% |
|
Studio Entertainment |
16% |
2% |
|
Consumer Products |
7% |
12% |
|
Interactive Media |
2% |
17% |
*CAGR = Compound Annual Growth Rate
Sports and Television a Different Type of Fantasy
The Media Networks division, which comprises 46% of Disney’s revenue, involves a different type of fantasy: Television and Sports. Television provides a means of escape on a day to day basis through general drama as well as sci fi/fantasy. In sports people can strategize as they watch and root for their favorite players or teams. ESPN is also what I like to call an “everywhere” brand. Almost every sit down restaurant I go to seems to have several different varieties of ESPN playing on their monitors. I suppose this is a result and cause of their success. Restaurants know of ESPN’S popularity and play it on their monitors thus increasing ESPN’s success with more ad eyeballs. ESPN, ABC, and the Disney Channel rank high in the Nielsen ratings as of May 27, 2012. ESPN ranked #3 in the top 25 AD-Supported Cable Networks in total viewership. The History Channel which is 42% owned by Disney as of the end of 2011 also scored #4 right underneath ESPN in the Nielsen ratings. ABC ranked #2 in primetime viewing.
Fundamentals
The company’s fundamentals are excellent. (Disclaimer: I own shares of Walt Disney Company.) Long-term debt to equity is 52% as of the end of 2011 which is good compared to some of the companies I have been researching lately. Total debt to equity is 83% as of the end of 2011 which is below my personal threshold of 85%. Free cash flow decreased in 2011 due mainly to an increase in capital expenditures of 1.2 billion dollars in its parks and recreation segment. Theme parks consume the most cash of all segments. Disney spent 2.7 billion dollars or 7% of revenue on the Parks and Resorts segment probably due to maintaining old rides and building new rides and new theme parks; however, Disney’s revenue and operating cash flow has risen steadily since 2009. The commitment to capital investment in its parks and recreation segment continue into 2012. Walt Disney’s p/e ratio of 17.38 is fairly reasonable given its recent run up in stock price.
Final Word
Given the diverse marketing opportunities for Disney’s properties through the five operating segments – toys for movies, movies for cartoons, books to movies, and so on – combined with the current excellent fundamentals and reasonable stock price, Walt Disney Company is worthy to be on anyone’s watch list or investment portfolio. I would take advantage of any major price correction that would increase potential returns. I have had this company on 5 year outperform caps call since 2007. I think this company will probably continue to outperform for the next five years.
Foolish Bibliography:
Despite Film Division Debacle Disney Shines by Tom Gibbs
Disney Pushes Marvel Acquistion to New Frontiers by Tom Gibbs
Other Sources:
Lions's Gate Investors Relations
www.postandcourier.com-"Avenger closing in on 'Titanic' expected to top $600 Million"
www.boxofficemojo.com-"Yearly Box Office"
www.medialifemagazine.com-"This Week's Cable Ratings"-May 22, 2012
www.medialifemagazine.com-"This Week's Broadcast Ratings"-May 22, 2012
Walt Disney's 2011 Form 10-Q-March 31, 2012
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