Disney: A Worthy Investment Despite The Price

Jun.21.12 | About: The Walt (DIS)

Walt Disney Co. (NYSE:DIS) has been one of the most consistent consumer discretionary stocks on the market over the years. From producing hits such as The Lion King and The Avengers to providing ESPN, Disney has been historically successful and is still profitable and growing. As a result, the stock is expensive. It exceeded its 52 week high at the market close, finishing at $47.51 a share. Although Disney stock is pricey it is not a high-flying stock. A relatively modest P/E of 17.02 and a forward P/E of 13.73 leverage more room for the stock to breathe, and consequentially to move higher.

Disney takes its revenue from a few primary sources: entertainment (television and cinema), theme parks, and licensed products. Although the more economically sensitive aspects of the company such as the theme parks and licensed products are being harmed by the European crisis, the company as a whole is positioned well for success.

Within the last decade Walt Disney Co. has purchased both Marvel and Pixar, revitalizing its entertainment arm and outsmarting its competitors. Marvel alone has been one of the primary drivers of the movie business in the past decade with movies such as Spider-Man, X-Men, and the recent smash hit The Avengers. Of course not all of the Marvel characters have had success in the box office, but when done right these movies are quite enjoyable and equally profitable. The Avengers has set up an entirely new line of movies for Disney. Iron Man 3 and Thor 2 will be in theaters within the next year and Captain America 2 is in the making. Even with lackluster box office performances from the original Captain America and Thor, the sequels should see larger audiences with the exhumation of each character in The Avengers. Disney is using Marvel to unleash a barrage movies and it should work because of the demand for these movies along with the short-term spark provided by The Avengers, which will also undoubtedly have a highly-anticipated sequel. Disney can and will use Marvel until it is completely dry, which should prove to be an excellent strategy for the coming decade.

Disney also picked up Pixar, the animation studio that has brought about the likes of Toy Story, Finding Nemo, Monsters, Inc., and Cars. Maybe it is just because I am growing older and tune out the release of new family movies, but it seems that the quality and frequency in which substantial family films are being released has decreased. This is where the brilliance of adding Pixar is visible; Disney has the upper-hand with the large audience of family oriented moviegoers. Through Disney it is releasing Brave along with Monsters, Inc. 3D and Finding Nemo 3D this year, and with few other options these movies should do relatively well.

The two additions of Marvel and Pixar also safeguard Disney from what I consider a consumer backlash against the eccentric, often mediocre Sci-Fi movies that continue to come out. Flops such as John Carter (unfortunately a Disney film), Battleship, and even Prometheus (when considering Box Office performance) to a lesser extent are proof of a rising distaste for films of this genre. The public has essentially been flooded with them since Avatar and it seems that the appeal is dwindling, which is not necessarily bad for Disney. Neither Marvel nor Pixar really adhere to this type of movie (despite some Sci-Fi aspects of the movies) which makes Disney the favorite for box office success in the near future. Disney has outmaneuvered its competition with the purchases of Marvel and Pixar and has essentially put itself in the position to place highest in the box office over the next decade.

Movies are not the only place Disney is seeing success in; television accounts for a large portion of Disney's revenue and poses a source of dependable and growing income. Media and cable networks such as ABC and ESPN (which is 80% owned by Disney) provide for 46% of revenues, as stated by S&P. ABC continues to be one of the major broadcasting networks but has an edge on its competition because of the prominence of its sports arm. ABC airs major events such as the NBA Finals and often shares popular ESPN analysts. Together, but mostly through ESPN, Disney has a near-monopoly on sports television. When Disney Channel and ABC Family are also thrown into the mix, Disney is one of the most powerful network conglomerates and revenue growth from these networks should be dependable. Television may not be the most exciting aspect of Disney but the steady income and consistent growth from it should serve to be beneficial to the company as a whole.

The world famous Disney World and Disneyland are iconic company signatures but also cornerstones of Disney's revenue. Theme parks and resorts worldwide make up 28% of revenue, as mention by S&P. Disney theme parks will continue to have appeal as long as Disney is a juggernaut in entertainment, but could often endure a facelift to spur consumer attraction. Disney recently invested $1.1 billion into California Adventure to address this, giving it a makeover and adding new features most notably of which being "Cars Land". This is a much needed renovation to California Adventure and Disney's efforts seem to have translated into success. The consensus of Cars Land is that it is wonderfully fun, which its jam-packed opening can attest to.

It is possible that this is the addition California Adventure needed to begin to emerge from the shadow cast over it by Disneyland, which bodes well for the volume of visitors of both parks. It should also be mentioned that consumer confidence remains high. As pointed out in Bloomberg, consumer confidence rose for the fourth straight week last week due to an improvement in personal finances. This bodes well for Disney's theme parks and resorts along with their licensed products, which should also see a large spike in gains because of the immense success of The Avengers and its dynamic characters. Ultimately, with a touch of refurbishment and rising consumer confidence now and in the future, the profitability of Disney theme parks and resorts will grow concurrently with the licensed products division.

The strategy implemented by Disney's management has been executed perfectly and has effectively positioned the company as best as possible for success. Disney is an entertainment conglomerate giant and has been showing its strength by hovering around and exceeding its 52 week high. Even with massive losses from John Carter earlier in the year the stock resisted around its high and continued to do so in the tumultuous trading session in May, showing strong investor confidence. The stock is expensive but that should not be seen as a deterrent, but as a sign of strength. Disney's strategy and diversified strength should bring about revitalized prosperity for the next decade, making it a good buy especially on pullbacks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.