Walt Disney Co. Earnings Analysis

| About: The Walt (DIS)

Walt Disney Co. (DIS) yesterday reported its earnings for F3Q 2013. Disney has recently suffered losses on projects like The Lone Ranger with Johnny Depp. However Iron Man 3 (under Marvel) raked in $1.2billion this summer. Disney acquired Marvel in 2009 for $4 billion. Based on Walt Disney Co.'s recently reported preliminary financial results, we analyze the company today relative to its peers.

The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-06-30 2013-03-31 2012-12-31 2012-09-30 2012-06-30
Revenues 11,578.0 10,554.0 11,341.0 10,782.0 11,088.0
Revenue Growth % 9.7 (6.9) 5.2 (2.8) 15.2
Net Income 1,847.0 1,513.0 1,382.0 1,244.0 1,831.0
Net Income Growth % 22.1 9.5 11.1 (32.1) 60.2
Net Margin % 16.0 14.3 12.2 11.5 16.5
ROE % (Annualized) 17.3 14.6 13.7 12.5 18.8
ROA % (Annualized) 9.1 7.5 7.1 6.6 9.7

Peers-set used for analysis

We use a peer set of the following companies for our analysis of Walt Disney Co.: Comcast Corp. Cl A (NASDAQ:CMCSA), Twenty-First Century Fox Inc. Class B (NASDAQ:FOX), Time Warner Inc. (NYSE:TWX), Viacom Inc. Cl A (NYSE:VIA), CBS Corp Cl B (NYSE:CBS), Vivendi (NYSE:VIV), Sony Corp. ADS (NYSE:SNE), DreamWorks Animation SKG Inc. Cl A (NASDAQ:DWA) and Lions Gate Entertainment Corp. (LGF).

Market Expectations of Growth

Walt Disney Co. currently trades at a higher Price/Book ratio (2.8) than its peer median (2.0). The market expects Disney to grow at about the same rate as its chosen peers (PE of 20.3 compared to peer median of 20.3) and to maintain the peer median return (ROE of 14.3%) it currently generates.

The company attempts to achieve high profit margins (currently 13.5% vs. peer median of 10.8%) through differentiated products. It currently operates with peer median asset turns of 0.6x. Disney's net margin is its highest relative to the last five years and compares to a low of 9.1% in 2009.

Can Disney improve its cost structure?

The company's year-on-year change in revenue of 3.4% is better than the peer median but it has not resulted in the same quality of annual earnings growth (18.2% compared to the peer median of 22.4%). This suggests that Disney's current relative cost structure needs to improve to move to a leading position among its peers. The company is currently converting every 1% of change in revenue into 5.4% change in annual reported earnings.

Disney's return on assets is above its peer median both in the current period (7.7% vs. peer median 5.7%) and also over the past five years (6.6% vs. peer median 3.1%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's comparatively low gross margin of 26.2% versus peer median of 45.2% suggests that it follows a non-differentiated strategy or is in a pricing constrained position. However, Disney's bottom-line operating performance is better than peer median (pre-tax margins of 21.5% compared to peer median 17.8%) suggesting relatively tight control on operating costs.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.