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Stocks: Disney Poised to Make Dreams Come True


With its strong product portfolio, competency in acquisitions, and a diversified business portfolio Disney is looking solid going forward.

Walt Disney (NYSE:DIS) showed a solid performance in 2013. With shares up more than 35% for the year, it is indeed one of the happiest stocks on earth.

With formidable brands such as ESPN, Walt Disney World, Pixar, Marvel, ABC, and Lucasfilm under its hood, Disney has a well-diversified business. Disney's long-lasting list of brands has added several streams of revenue to its portfolio and has allowed the company to maintain a strong edge in the entertainment industry.

For fiscal Q4 2013, Disney reported strong earnings. While net income of $0.77 per share met consensus expectations, revenue of $11.6 billion surpassed estimates of $11.4 billion. Key positive highlights from the quarter are as follows:
  • Net income increased 12% when compared with Q4 2012.
  • EPS increased by 13% when compared with Q4 2012.
  • Disney's parks division posted 8.5% revenue growth and a 15% increase in operating profit. Based on Q4 2013 results, Disney is expected to continue benefiting from the high tide in economic activity and rising consumer sentiment in 2014, which would further increase attendance in its theme parks.
  • Operating income at Disney Consumer Products surged 30%.
  • Walt Disney Studios managed a 35% jump in operating income.
  • Overall operating income increased by 6% when compared with Q4 2012.
However, it was not sunshine and rainbows for all of the divisions of the company. Media networks, its largest, saw operating income decline by 8%, with cable and broadcasting income suffering by 7% and 18% respectively. Disney attributed the decline in cable income to deferred fees pertaining to ESPN's annual programming commitments and the hit on broadcasting income to higher prime time broadcasting costs.

Overall broadcasting costs increased due to the addition of new college football rights, contractual rate increases for NFL, MLB, and college football rights, and more original programming content on Disney channels.

Market IQ's proprietary fundamental metrics give Disney an outperform rating because the company has high quality and is valued appropriately.

The company's qualitative strengths can be seen in several areas, such as return on equity (ROE), revenue growth, and EPS growth.
  • ROE increased to 14.18% in Q4 2013 vs. the 13.65% in Q4 2012. However, despite the increase, Disney still lags the ROE in the industry, which sits at 19.63%.
  • Since Q4 2012, revenues have increased by 7.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • EPS has increased by 13.2% in Q4 2013 when compared to Q4 2012. The company has demonstrated a pattern of positive earnings-per-share growth over the past two years. This year, the market expects an improvement in earnings ($3.92 vs. $3.38).
Based on Market IQ's valuation metrics, Disney has average valuation compared to its peers (see below).

Disney has made some interesting strategic moves by partnering with Netflix (NASDAQ:NFLX) for a movie output deal, which will make Netflix the exclusive home for Disney theatrical releases into 2017, thus adding another avenue of distribution to its kitty.

Additionally, the company has partnered with Netflix to create various live-action series based on Marvel characters. These series will begin airing in 2015 and will focus on several lesser-known characters in the Marvel roster, such as Daredevil and Iron Fist. The deal not only enhances Disney's already powerful superhero arsenal, but also provides more flexibility and an opportunity to replicate Marvel's blockbuster movie craft on the smaller screen.

The 2009 acquisition of Marvel has already paid off in spades for Disney with tremendous successes at the box office in 2012 and 2013 courtesy of The Avengers, Iron Man 3, and Thor 2, which all raked in record profits. Perhaps more exciting is the $4 billion Lucasfilm acquisition made by Disney that added the successful Star Wars sequel trilogy to its portfolio. The first installment, Star Wars: Episode VII, is set to go into production in early 2014 and is scheduled for release in December 2015. While many analysts argue that Disney paid a very steep price to rope in the sci-fi franchise, it should be noted that making a film is just one source of revenue from the investment, as Disney's diverse business offers several opportunities across TV content, theme parks, and merchandise.

With an unparalleled stable of characters in Marvel, Star Wars, Pixar, and Disney Animation, Disney is expected to outperform its peers, which only have one or two mega-franchises in their baskets. So the threat to Disney is not from outside, but from within -- it can't afford to make bad movies. However, given its impeccable record in the past, it is not hard to imagine that Disney's franchises will potentially continue to grow in value over time.

Disney also maintains a strong foothold in the US sports market through ESPN, which generates almost half of the operating profit for Disney. Using its wealth, ESPN can afford to buy the rights to nearly anything. As ESPN has added costly programming over time, it has consistently been able to raise its fees and has used that money to outspend its competitors and sustain a media empire unlike any other. With Monday Night Football, college football deals, and multiple nights of baseball, ESPN is likely to remain a major cash cow for Disney in the upcoming years.

With its strong product portfolio, competency in acquisitions, and a diversified business portfolio Disney is looking strong going forward.

This article was written for Minyanville by Adil Yousuf of Market IQ.

An integrated solution to help you understand your investment's strengths and weaknesses quickly and effectively, the Market IQ Terminal offers investment analysis and portfolio optimization based on proprietary fundamentals, market sentiment, analyst sentiment, and technical parameters.
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No positions in stocks mentioned.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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