Disney's Super Heroes Will Make Your Investment Climb

Aug. 8.14 | About: The Walt (DIS)

Summary

Disney reported another splendid quarter backed by its blockbuster movie franchises and the 2014 FIFA World Cup that bought increases to both its top and bottom lines.

Upcoming sequels and contracts for broadcasting exclusive content should drive the top line in the future.

The Shanghai project is much bigger than it would appear since it offers grounds to establishing a presence which may last for an indefinite period.

Disney's (NYSE:DIS) stock has soared 31% in a year on the back of successful film releases and ESPN which remains a top preference for sports enthusiasts. The share price climbed an additional 18 bps this week to $86.9 during after-hours trading as Disney announced its third quarter results. The performance surpassed analysts' expectations.

In this article I will discuss the recent earnings and summarize the important events for investors. I will also highlight some specifics about the future potential of this movie manufacturer.

Third Quarter

Source: Earnings Release

Total revenue for the company climbed 8% to $12.4 billion from last year's level. A material part of the growth came from the company's decision back in 2009 to purchase Marvel Entertainment. The acquisition brought an array of comic book superheroes which are proving to be highly successful in the summer movies arena. Releases like Captain America, Maleficent, Frozen and the epic Guardians of the Galaxy continue to contribute their share of success.

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Source: The Numbers

In less than a week since its release, Guardians of the Galaxy has covered its production costs and is all set to contribute positive earnings growth (see table above). A movie's success can be estimated by the initial response it gets. Guardians of the Galaxy was a high risk project for the company as it is one of Marvel's most vague character series, set entirely in outer space. Though the movie received encouraging pre-release reviews, the overwhelming positive reception of the movie was not expected. Building on its success the company will releases a sequel in 2017.

The impact of Easter falling in the third quarter boosted the performance of the Parks and Resorts segment. Frozen and other releases improved the top line at both Studio Entertainment and Consumer Products segments. In this segment Disney benefited from its franchises and experienced double digit growth in both revenues and profit since the last four quarters.

Higher programming expenses due to bigger sports rights deals, which included the World Cup and NFL, brought some pressure to the bottom line. The expenses are necessary to engage the audience on Disney's sports channels. Continuing this growth, Disney has signed a multi-year distribution contract with The National Cable Television Cooperative (NCTC) to broadcast sports, news and entertainment content to the customers of NCTC members across television, smart phones and other connected devices.

The net result of these top and bottom line movements was a 27% increase to $1.28 per share in adjusted earnings for the third quarter. Analysts expected $1.17 per share so the higher figure was another plus.

The company will be releasing the second Avengers movie next year and this should also bring in additional revenue. The Star Wars franchise will also turn up the heat after the viewing of Episode 7 in the coming December. This is a much-awaited sequel that the franchise's fans and enthusiasts have waited for a decade and will be eager to watch. The generated revenue will make investors happy in return.

The company is also developing ideas and designs for a far greater Star Wars presence in its theme parks. Though it will provide further details next year, I am sure that the contribution will be as positive as the contribution that other brands have given.

The Shanghai resort has seen a further $800 million investment added to add to its appeal. Disney and Shanghai Shendi Group already were committed to spending $4.7 billion on the theme park resort which is scheduled to open at the end of next year. The additional amount will be used to increase the number of rides operating on opening day. Increased spending at the resort reflects the company's belief that the opportunity in Shanghai will truly be a profitable venture. This is because China's changing perspective to western entertainment and holiday travel brings another set of opportunities like the one Disney got during the establishment of Walt Disney World in Florida during the 1970s. To complement this opportunity, Disney is also building its first full-size store in China which will be a 53,000 square-foot building in Shanghai making it the largest retail station of the company.

Bottom Line

Disney's debt to equity is smaller than the industry at present. The ratio of 0.2 indicates that the company can finance more projects should it need to through borrowing. Though cash reserves are excellent and fundamentals like revenue growth, which stand at 5.8%, are higher than its peers (indicating that future inflows should be positive as well) lower debt gives a strong balance sheet position. Everything seems to be going well for Disney and it should continue to be a return generator for investors. Investors should relax, go to Disneyland and enjoy the ride!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.