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Why Disney is Still a Buy

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

On August 31, 2009, Disney (NYSE: DIS) broke my heart.  

I remember the morning clearly as I checked my news feeds and saw shares of MVL trading up nearly 30%. Was it a glitch? An anomaly in my ticker feed?  Alas, I nearly spit out my coffee as I read the headline: Disney to acquire Marvel in $4 billion deal.  One of my largest holdings had skyrocketed, taking my portfolio along for the ride.  I should have been celebrating, right?  

So Why Was I Upset?  

Marvel was my favorite company.  My favorite stock.  In fact, as an excited young investor, Marvel was the first individual stock I had ever purchased.

Unfortunately, Disney was also excited and eager to absorb my small cap, high growth, geek-friendly play into their own large cap, dividend-paying, family-friendly behemoth.  Since I had reserved the Marvel piece of my portfolio for something a little more growth and a little less dividend, I naively sold my shares and went on my way.

Don't get me wrong; if Marvel had to be acquired, I couldn't name a better place for it to end up than in the white glove-clad hands of Disney.  In fact, that's exactly why I later realized Disney was worth a deeper look. Even if I were to ignore the company's existing property, when I considered the combination of its deep pockets and new toy box of over 9000 characters in the Marvel Universe, I decided to give shares of DIS an "Outperform" CAPScall in August, 2010.

Even Near All Time Highs, Here's Why Disney is Still a Buy

Shares of DIS are up 42% and have beaten the market by more than 20% since then.  For reference, the company currently trades a mere 6% below its all time high set last month.

Now Disney's at it again and doling out a serious case of déjà vu with last week's $4 billion acquisition of Lucasfilm.

This time, however, I'm excited for Disney.  Having barely begun to tap the potential of its Marvel assets, Disney's moat is now even more formidable with Star Wars and Indiana Jones tucked into its jedi belt.

Star Wars Fans Rejoice!

Unsurprisingly, Disney has wasted no time and already announced preparations for a Star Wars Episode VII movie slated for release in 2015.  In addition, the company has plans to release a new Star Wars movie every couple years going forward.  How much can Disney squeeze out of its newest franchises, you ask?  Similar to its 9000+ universe of Marvel characters, did you know there are more than 100 Star Wars novels?  Don't worry about people growing tired of new material, either; as a self-described geek and Stars Wars fan, I can tell you first hand of legions of rabid fans who will obsess over every minute detail of each new movie.

Even so, aside from films, I'm certainly not alone in realizing Disney has many more ways of quickly recouping its $4 billion investment.  As Fortune writers pointed out last week, "'Star Wars' films have grossed a modest-sounding $4.6 billion globally, according the company. But total retail sales -- everything from action figures and Halloween costumes to video games -- have topped a staggering $25 billion. And according to NPD data, it has been the top toy brand for boys during six of the last seven years."

It's a safe bet, then, Disney is well aware of Lucasfilm's post film money-making opportunities in merchandising.  By the way, speaking of toys, who says Disney can't have its cake and eat it, too?  Hot on the heels of the Lucasfilm news, rumors quickly surfaced Disney was exploring options to acquire Hasbro (NASDAQ: HAS).  After all, as new owner of the top toy brand for boys during six of the last seven years, why wouldn't Disney want to actually make the toys it sells?  Shares of HAS are trading at a relative discount to the market with a sub 14 P/E ratio, but with a current market cap of nearly $5 billion, Hasbro would prove a larger beast for Disney's beauty to tackle.  Nonetheless, Disney continues to show an uncanny ability to make the most of its investments.  If the price is right and the synergies are there, I see no reason DIS shareholders wouldn't celebrate in bringing Hasbro aboard.

Heads I Win, Tails You Lose

Disney is all set to announce its third quarter earnings tomorrow, with analysts projecting net income growth of over 15% year-over-year to 68 cents per share.  Regardless of its Q3 results, however, I still believe Disney is a "Buy."  Nobody will be surprised if Disney outpaces analyst estimates for its fifth quarter in a row, and its shares will still rise.  If instead Disney posts a rare miss and we're lucky enough to experience a pullback, I'll be even more eager to buy and collect the dividend while I wait for DIS to bounce back.

In the end, to call Disney the "House of Mouse" vastly understates its reach.  As easily the most diversified media conglomerate in the world today, Disney now has at its disposal a near-infinite number of ways to shape our entertainment landscape and will handsomely reward shareholders in the process.

symie5 has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney and Hasbro. Motley Fool newsletter services recommend Walt Disney and Hasbro. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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