Media giant Disney (NYSE:DIS) reported a strong fiscal year 2012 third quarter recently. Revenue grew 4% year-over-year to $11.1 billion, which was just a tad shy of consensus expectations. Meanwhile, earnings grew 31% year-over-year to $1.01, which was much higher than the Street predicted. As a result of strong profitability, the firm generated a whopping $2.1 billion in free cash flow during the quarter.
Among the strongest segments for Disney was its Studio Entertainment segment. Though revenues were flat year-over-year, operating income increased 19% to $313 million due to the strong performance of The Avengers and Brave. The Avengers has grossed well over $1 billion in box office sales globally, making it the third-highest grossing film ever made. However, we thought securing the film's director, Joss Whedon, to a three-year deal was the most encouraging news. Whedon will write and direct The Avengers 2, and he will work with Disney to create a live action series based on the group of superheroes. Though some may attribute the success of the film to Marvel's huge fan base and great characters, Whedon is a proven veteran who has developed many well-received TV programs (Buffy the Vampire Slayer, Angel, Firefly) and can make films that satisfy both hardcore comic fans and casual fans.
Cable Networks and Broadcasting revenue grew 3% to $5.1 billion during the third quarter. Disney Channel continues to be a cash cow, and popular shows on ABC Family like Pretty Little Liars are helping the network gain some serious traction. We're also huge fans of ESPN, which we think is poised for strong growth going forward. Since live sports are now commonly accepted as substitutes for attending games in-person and are "DVR-proof," ESPN should continue to benefit from increased advertising dollars.
Parks and Resorts revenue increased 9% to $3.1 billion, driving operating income growth of 21% to $630 million. Performance increased across the board, driven by improvements in the cruise line business, Tokyo Disney Resort and the domestic parks business. Though this may seem counterintuitive, we think the domestic business will remain a relatively attractive vacation destination as long as the economy is somewhat sluggish. A stronger domestic economy, increased consumer confidence and a weak Euro could actually lead to more international travel (hurting domestic leisure travel), in our view. Still, we do not think international substitutes will be a huge threat to Disney's US theme park or cruise business in the near term.
Though the firm's quarter was fairly strong and we remain optimistic about its prospects going forward, we think shares of Disney are fairly valued at current levels. Further, the company only scores a 5 on our Valuentum Buying Index (our stock-selection methodology), so we are relatively neutral on its shares at this time. Nevertheless, we may become interested in establishing a position in Disney in our Best Ideas portfolio on any material pullback that drives shares below the low end of our fair value range.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.