The Walt Disney Company's (NYSE:DIS) stock is trading at its highest level after the company reported tremendous results for the second quarter of fiscal year 2014. Since the start of 2013 the stock has increased around 58% and is currently trading at $81.03 per share. The company continued its impressive earnings stream with the global success of the animated blockbuster Frozen and the ripple effect on the sales of DVDs, music, and other merchandise tied to the movie. The success of Frozen demonstrated the impact that one blockbuster movie can have on the entertainment conglomerate's other businesses including improved traffic at theme parks, increased sales at retail stores in malls, records and DVD sales.
Frozen Lifted the Second Quarter Results
Disney generated record earnings for the second quarter on the back of strong revenues growth. For the quarter Disney successfully added 10% revenue growth and revenues increased from $10.6 billion to $11.6 billion. The improved revenue stream primarily came from the strong performance of its film studio. Frozen has become the top-grossing animated movie in box office history with $1.169 billion worldwide earnings. The film has sold $400.34 million worth of tickets at domestic theaters since its opening in November and foreign box offices have added another $768.9 million. Due to these numbers the profits from Disney's Studio Entertainment segment more than quadrupled to $475 million.
The double-digit growth from each segment is an indication of how well the company is performing and the second quarter earnings were well above analysts' expectations. The net income boosted at an impressive growth rate of 27% to $1.92 billion from $1.51 billion in the same quarter of the previous year. The adjusted earnings per share increased 41% to $1.11 from $0.79 earnings per share and beat analysts' earnings per share estimate of $0.96. The diluted earnings per share increased 30% to $1.08 from $0.83 in the same quarter of 2013.
Source: Earnings Release
Disney performed well across all segments and each experienced double-digit earnings growth. The Media Network segment accounted for 44% of total revenue but added comparatively less growth. The revenues from the Media Network segment increased 4% to $5.23 billion and operating income grew 15% to $2.13 billion for the quarter. The growth was primarily due to ESPN and domestic Disney channels and effective programming and production cost controls. Broadcasting revenues remained flat but operating income increased due to higher affiliate revenues and lower costs.
Visitor growth and higher guest spending led to an 8% revenue increase at Disney parks and resorts in the second quarter. Segment revenues reached $3.56 billion in the second quarter up from $3.30 billion during 2Q FY 2013. Operating income at global parks and resorts grew 19% to $457 million due to higher spending at Walt Disney World Resort in Orlando more visitors at Disneyland Resort in Anaheim and an increased number of rooms occupied at both resorts.
The Studio Entertainment segment increased Disney's revenues and earnings. Although this segment accounted for only 15% of total revenues it experienced the highest amount of growth. Studio Entertainment generated revenues of $1.8 billion with 35% growth compared to $1.34 billion revenues last year. The operating income was $475 million reflecting an increase of 303% compared to $118 million in the second quarter of 2013. Higher operating income was driven by an increase in domestic home entertainment, international theatrical and television and subscription video on demand distribution results. The increase in the domestic home entertainment was due to higher unit sales based on the success of Frozen and Thor: the Dark World.
Disney Theme Park in Shanghai
Disney intends to increase its theme parks and resorts and hopes to grow in China with the expected opening in 2015 of a Disney theme park in Shanghai. The new theme park is being constructed at an ideal location surrounded by 330 million people within a three-hour drive. The actual capacity of the park is yet not confirmed but recently Disney entered into an agreement with Shanghai Shendi Group to enhance the capacity of the park by further investing $800 million. The increased investment will be used for additional attractions, entertainment and other offerings with the majority targeted for the opening day of the park.
The expansion and additional attraction will help the company to receive a successful start and going forward the total theme park visitors will increase to 221 million in China by the end of 2020. Through this enhanced capacity Disney will be able to fully benefit from visitor growth. The upcoming theme park in Shanghai will be the company's third-largest resort after the Walt Disney World Resort in Orlando and Disneyland Paris. Furthermore, the Chinese market is expected to rise over 30% annually over the next three years and Disney is headed in the right direction.
Recently, Captain America 2: the Winter Solider has surpassed the first Captain America movie in the global box office with $237.7 million. Disney's Studio Entertainment segment's revenues and earnings are expected to maintain its fast growth pace with its upcoming blockbuster titles including Avengers: The Age of Ultron, Guardians of The Galaxy, Pirates of The Caribbean 5, Captain America 3 and Star Wars Episode 7.
Over the last twelve months Disney's total return of 27.34% has outperformed the S&P 500's total return of 18.15%. Currently the stock is trading at a forward P/E ratio of 17.64X which is slightly lower than Twenty-First Century Fox's (NASDAQ:FOXA) forward P/E of 17.91X. For the next five years Disney's earnings per share are expected to grow 16.03% annually. The target price for this stock is $96 which reflects an upside potential of 18% and mostly likely Disney will hit the target.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.