Scan the headlines on Disney (DIS) and it's difficult not to come to the conclusion that it is operating on most if not all cylinders.
Disney continues to churn out blockbuster films. The company recently purchased LucasFilm and now owns one of the most popular movie franchises, Star Wars, which the company hopes to capitalize on by releasing a sequel and spin-off films beginning in 2015.
At the end of last year, the company reached an agreement granting Netflix exclusive streaming rights to Disney, Pixar, Marvel as well as LucasFilm's movies.
Across The Board Growth
In announcing its fiscal first-quarter financial results recently, the company reported that its Media Networks division, its Parks and Resorts division, and its Consumer Product division increased revenue 7% each. The Interactive division had a 4% increase in revenue, while the Studio Entertainment division was the only one to report lower revenue, at 5%.
The studio business should have better performance in 2013 due to the movies Disney plans to release in 2013 including "Oz, the Great and Powerful," "Iron Man 3," "Monsters University," "The Lone Ranger," "Thor: The Dark World," "Frozen" and "Saving Mr. Banks."
Within its Media Networks, Broadcasting accounted for a 6% growth in revenues and 16% growth in operating income, and cable networks accounted for 7% growth in revenue and a 2% decline in operating income.
Overall, Disney's fiscal first quarter performance was above expectations. The company generated $1.1 billion in operating cash flow. Revenue jumped 5.2% year-over-year to $11.34 billion, exceeding consensus estimates.
This comes after its previous quarter in which it beat both top-line and bottom-line expectations. Revenue in that quarter grew 5% year-over-year and came out $130 million ahead of consensus.
Analysts have projected Disney's revenue growth to be 6.6% for both 2013 and 2014 with operating margins expanding as well. Earnings per share are also estimated to grow from $3.13 to $3.92 by 2014.
And the headline that matters most to investors: Disney shares have been on a steady upswing in the last year, rising from $40.88 to a new 52-week high of $58.82 on April 8. Shares are trading at a price-to-earnings ratio of 18.6.
Disney's annual dividend is $0.75, for a current yield of 1.3%. It is currently paying out only 24% of earnings.
The company's debt is just 60% of its equity, and it has $3.4 billion in cash on hand.
Disney's profit margins and returns far exceed the industry average. For the past five years, Disney has earned an average annual net profit margin of 11.4%, more than double the 5.6% industry average. It has an average return on assets of 6.5%, compared with the industry average of 2.8%. And its average annual return on investments is 9.4%, compared with a 4% industry average.
ESPN, Its Flagship Operation
One small area of concern is the future of Disney's flagship brand, ESPN, which Forbes recently estimated to constitute 40% of Disney's overall value.
For years, ESPN operated as a virtual monopoly in the world of sports programming. It operates its primary network, plus ESPN2, ESPNU, ESPNNews, ESPN Classic and ESPN Deportes. The network has about 100 million subscribers in the U.S.
Because of that monopoly and because it offers the most comprehensive lineup of sports - including the NFL, NBA, Major League Baseball, and college football and basketball - ESPN could charge the highest amount per subscriber of any cable network. A recent article in Forbes estimates the cost has risen from $3.65 a subscriber in 2008 to $5.05 in 2012. In 2010, ESPN charged $4.08. The second most expensive network was Fox Sports Net at $2.37. No other network charged more than $1.
The only option a cable operator has to paying those high fees is to not carry the ESPN networks; which would lead many to cancel their pay-TV service.
But increasing competition for sports programming may give programmers other options and potentially cut into ESPN's bottom line. Rupert Murdoch's Fox franchise is developing a sports network to compete with ESPN. NBC also recently launched a sports network and CBS has operated one for a few years. While none appear to be a threat to ESPN's dominance anytime soon, some will point out that Fox News ended CNN's dominance in the cable news space.
Even if they don't defeat ESPN in the ratings, competition for programming means ESPN may at least have to bid more for sports contents to outbid its competitors, which would impact margins. The good news is that the majority of ESPN's key sports are locked up past 2020, with NBA (2015/16) and NASCAR (up in 2014) the main exceptions.
But even if ESPN loses some of its leverage, Disney has enough quality assets to keep the company growing.
Streaming Video to Video Games
One of those potential assets is Hulu, the online streaming video service similar to NetFlix. Users can stream full TV shows for free, though a paid portion of the service known as Hulu Plus requires an $8 monthly fee for many of the same shows. The fee is also required to access Hulu on mobile devices.
It was recently reported that the service's co-owners, Disney and News Corp., are finalizing the future of the service. According to the report, the plans under consideration include putting Hulu up for sale. Disney and News Corp. may also buy out the other's share.
Both companies have said the service is losing money, despite the $700 million in revenue it generated in 2012. At the end of last year, it had more than 3 million paying subscribers. Hulu's costs include licensing shows and paying for computer servers.
Another upcoming release that could increase the company's fortunes is a video game called Disney Infinity. It will allow players to create virtual worlds with Disney characters from in their own worlds or in entirely new worlds built by each user. Infinity is set to debut in August.
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