Movies Just the First Act for Disney

05/20/2013 7:45 am EST




This company has moved well beyond Walt's dream, writes Chad Fraser of Investing Daily.

Modern films are massively expensive to make—and equally complicated. And in light of the fact that major studios typically only release ten to 20 movies a year, any box office flops can have a significant impact on profits.

For example, in March 2012, the Walt Disney Company (DIS) released the sci-fi film John Carter, which cost $250 million to make, according to Box Office Mojo, but earned only $74 million domestically. Fortunately, it pulled in $188 million overseas, but it's likely still in the red, because the company reportedly spent $100 million on marketing.

John Carter's poor performance aside, Disney has a long history of successful moviemaking. The company owns the rights to some of the most popular films ever made. It has also added to its movie assets through a series of acquisitions, including its $7.4 billion purchase of Pixar, maker of the successful Cars and Toy Story films, in 2006. It added Marvel in 2009 at a cost of $4.2 billion.

Disney has done a good job of building on the strengths of its recent acquisitions. The latest example is Iron Man 3, which hauled in $175.3 million on its opening weekend. That's the second-highest take ever, behind The Avengers, a 2012 Disney/Marvel film.

Disney is diversified beyond moviemaking—from theme parks to retail stores to television networks—which helps shield it from the odd disappointing film. In the latest quarter, all of its businesses, including its film division, posted strong gains.

In its fiscal 2013 second quarter, excluding unusual items, Disney's earnings rose 36.2%, to 79 cents. That topped the consensus forecast of 77 cents. Revenue rose 9.6% to $10.55 billion, also beating the Street's expectation of $10.49 billion.

The company saw gains across all of its businesses. Parks and Resorts, which supplies 31% of Disney's overall revenue, led the way with a 14% sales increase and a 73% jump in operating profits, thanks to higher guest spending and more visitors. The company's Disney Fantasy cruise ship also launched in March.

Other standouts included Media Networks (47% of total sales), where sales jumped 6% and operating income rose 8% due to a strong performance at ESPN. Sales at the Consumer Products division (7% of the total) also gained 12%, and operating profits jumped 35%.

The Studio Entertainment division (13% of total sales) also returned to profitability, posting operating income of $118 million compared to a loss of $84 million a year ago. Revenue rose 13%, to $1.4 billion. Results were boosted by positive responses to Wreck-It Ralph and Oz the Great and Powerful.

Disney now aims to replicate its success with Pixar and Marvel at Lucasfilm, creator of the Star Wars film series, which it bought for $4.1 billion in October 2012. The company plans to grow and aggressively market the landmark franchise by releasing a new Star Wars film every year, starting in 2015.

This week, Disney and Electronic Arts (EA) announced that they have entered into a new multiyear licensing agreement under which EA will produce Star Wars-based video games. Electronic Arts is the third-biggest video game publisher by revenue.

Disney stock trades at 20.1 times the $3.29 a share that the company earned in its latest 12 months. The average analyst estimate calls for earnings of $3.46 a share in 2013, giving the shares a forward P/E of 19.1. Earnings are forecast to rise to $3.90 in 2014.

The company's dividend history is also lengthy. It has paid dividends every year since 1982. Its current rate of 75 cents a share, paid annually, yields 1.14%.

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