Disney (NYSE:DIS) is a diverse company and a member of the Dow 30 with revenues in fiscal 2011 (ended October 1) of $40.9 billion. It has five segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive Media. I think that Disney's shares, at current valuation levels, will provide good long-term value, and shareholders should benefit from improvements in the economy and leisure/entertainment industry.
The company has a well-diversified portfolio of products and a global reach (most recently it formed an animation partnership in China). Also, its segments appear to be well-managed, based on profitability and growth metrics, compared to other companies with similar businesses. Even though Disney stock is trading almost at a 50-year high, I believe that its stock price offers good long-term risk-rewards benefits.
Disney has 1.8 billion shares outstanding and a market capitalization of about $77.7 billion. Its enterprise value is about $88 billion, which includes $3.8 billion in cash and $11.2 billion in long-term debt. The stock pays an annual dividend of $0.60 per share for a yield of 1.4%. Disney has a profit margin of 13.3% compared to a margin of about 8% for the industry, sector and the S&P 500 index. Its price to earnings ratio based on trailing twelve months earnings is 16.4, higher than the S&P 500 ratio of 15 but lower than that of the industry and sector of 18.7 and 19.9, respectively. The average estimate for the fiscal year ending September 30, 2012 is for earnings of $3 per share. This gives a forward price to earnings ratio of 14, 15% lower than the current price to earnings ratio. I expect the price to earnings ratio to stay the same or rise slightly from the current 16.4, so the stock has the potential to rise over 15% in the next six months.
While Disney has strong margins and a slightly undervalued stock. I think the company can benefit mostly from its international exposure in the coming years. All of its products are easily "exported" around the world. This is evident in the company's fiscal 2011 revenue by region with 25% of revenues coming from overseas. I believe Disney can grow this share to 35% to 40% by the end of 2015. In addition, overseas business contributes more to the company's bottom line as the domestic operations account for 72% of operating income compared to 28% from the international operations. Following is a segment by segment analysis and how each fares compared to other companies.
Media Networks: A-
During fiscal year 2011, the media networks segment reported $18.7 billion in revenue (9% higher than 2010) and operating income margin of 32.8% or $6.1 billion (a rise of 20% compared to 2010). For comparison, during 2011, CBS (NYSE:CBS), NBC, which is shared by Comcast (CCT) and General Electric (NYSE:GE) and Newscorp's (NASDAQ:NWS) Fox reported operating margins of 22%, 24%, and 22%, respectively. While it compares favorably to the major network studios, compared to Viacom (NYSE:VIA), which had 42% operating income margin for its media networks segment, Disney lags. I think Disney will improve further with less disruptions in its ESPN programming and new Disney channel offerings. A potential threat is Newscorp's intention to launch a competitor to ESPN, which is the crown jewel of Disney's media networks segment.
Park & Resorts: B+
Compared to 2010, the parks & resorts business grew its revenue 11% in fiscal year 2011 to $9.3 billion and had an operating income margin of 16.7%. NBC Universal own themed parks' segment had an operating income margin of 44% (before appreciation and depreciation). Two other competitors that are pure park companies, Six Flags (NYSE:SIX) and Cedar Fair (NYSE:FUN), achieved operating income margins in 2011 of 13.7% and 23.2%. While somewhat less profitable than its competitors, Disney's park & resorts should benefit from international growth (Disney is opening a park in Shanghai) and improvement in the travel industry. Disney owns a cruise line and hotel operations and comparison with other theme parks can be a little misleading. Also, Disney has an advantage, as it owns valuable characters that it uses in its parks (Pirates Of The Caribbean, Toy Story, and superheroes, to name a few). I think that a grade of B+ is warranted as there is room for improvement.
Studio Entertainment: C
The studio entertainment business had revenues of $6.4 billion in 2011 (down 5% compared to 2010) and operating income of $618 million for an operating income margin of 9.7%. This compares to an operating margin of 13.4% for Newscorp's filmed entertainment segment and negative operating income at NBC Universal's movie studio. Pure play studios such as DreamWorks Animation (NASDAQ:DWA) and Lions Gate Entertainment (NYSE:LGF) had operating income margins of 15.6% and 4%, respectively, during their 2011 fiscal years. Disney's studio entertainment had a recent flop with one of its movies, John Carter, and the company even had to offer a two for one movie ticket promotion in the United Kingdom. This was somewhat rectified by the release of the cute movie Chimpanzee. Given the revenue decline during 2011, the somewhat rocky start in 2012, and the lower operating income margin compared to DreamWorks Animation and Newscorp's film business, I think a grade of C is well-deserved.
Consumer Products And Interactive Media: B-
I combined the consumer products and interactive media segments as I believe consumers are increasingly buying more digital content and the distinction is becoming less clear between digital and non-digital products. Consumer products and interactive media achieved revenue of $4 billion in fiscal year 2011 and an operating income margin of 11.3%. This compares favorably to the consumer cyclical sector which had an operating margin of 8.6%. I give a grade of B- to this segment as I think Disney needs to expand its interactive media products faster and more efficiently while curtailing its stores.
In conclusion, Disney is a diversified company with valuable brands and assets and in my opinion an overall grade of B- is fair. Most of the segments have above average results, led by the media networks which has the best network in sports. Also, Disney has international exposure and I estimate that it will provide a powerful engine for revenues and earnings in the coming years. At current valuations, the stock provides a good opportunity to participate in the future success of Walt Disney.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.