Disney (DIS) is one of those remarkable companies that seems to have an uncanny knack for figuring out what its customers want and then giving them even more of it. Sounds simple, I know, but not many companies have wracked up lifetime gains of nearly 47,000%. That said, Disney is a surprisingly volatile stock and brand value alone won't save investors who buy at the wrong times - investors who bought in 14 years ago are sitting on just 19% gains (excluding dividends) and looking up longingly at the S&P 500's returns over that time period.
With that in mind, Disney's solid performance in Q1 and strong stock may be a sign that new investors should cool their heels a bit before taking the plunge with new money.
Good Numbers Across The Board
Disney did everything it needed to do this quarter, and a little extra for good measure. Overall revenue was up 6% (and a little better than expected), fueled by strong growth in the networks, parks and consumer segments, while studio revenue dropped by double-digits.
Profits were also a little better than expected, as segment operating income rose 10% and corporate operating income rose about 11%. Profits were helped by good results in networks and fantastic results in the parks (even excluding an insurance payment). The performance of studio was pretty ugly (reversing a year ago profit of $77 million to a loss of $84 million) on the John Carter bomb, but the loss was actually less-bad than feared.
Results Still Riding The Recovery
Disney has always been more economically sensitive than most analysts and investors seem to want to acknowledge. Yes, people need entertainment in good times and bad, but the amounts they're willing to spend on it do change with the economy.
To that end, the mid-single digit ad revenue improvements at ABC and ESPN are encouraging, even if company-owned TV stations fared worse. It's also worth noting that Disney's ESPN and ABC Family properties continue to show solid growth. While ABC Family and the namesake Disney Channel will probably never dominate rivals like Viacom (VIA) in family/youth entertainment like ESPN dominates in sports. These networks are becoming more valuable properties.
Parks also seem to be riding the recovery. Attendance picked up about 7%, with per-cap spending up about 5%.
Studio Is Always Going To Be Noisy
The performance results from Disney's studio efforts are likely going to always be the biggest deltas in the Disney story, given the inherent difficulty in predicting which movies will succeed or flop. Clearly John Carter failed (and I would like to make a personal plea to movie studios to just stop trying when it comes to stories by old fiction authors like Howard and Burroughs). But it's equally clear that The Avengers is a major hit.
Unless Disney can sign Joss Whedon to an exclusive rights deal and lock him in the corporate basement, this up-and-down cycle is never going to go away. Sony (SNE) hasn't been able to figure out the secret formula to guaranteed success, nor has Time Warner (TWX) or anybody else. Luckily, the winnings make it worthwhile in the long run - especially for a company like Disney that can exploit the tie ins for the merchandising and theme park attractions.
Buy It Right, Or Be Very Patient
As I said in the beginning, Disney's greatness as a company doesn't universally extend to its stock or stock price. Movies bomb, investors fret about executive succession plans, and analysts bemoan the money that the company pays for assets like Pixar, Marvel or ESPN, even though these deals seem to work out in the end.
All of that said, one complaint I do have about Disney is its returns on invested capital. It's not that Disney is a bad company in this regard, as it is certainly better than the average S&P 500 company, but they just don't seem as high as they should be for a blue-chip mega-brand like Disney.
Right now, Disney would seem to be worth a price in the high $40s on the basis of nearly 10% compound annual free cash flow growth for the next decade, discounted back at 9%. Slightly under-priced today, I can see how an ongoing recovery in the U.S. economy could push these shares higher, but looking at the chart makes me more interested in waiting for another one of those periodic Wall Street "freak outs" on this name.