The Walt Disney Company (DIS) has been one of the Dow's best-performing stocks in 2012, up more than 40% YTD; this trails only Bank of America (BAC) and Home Depot (HD), up 67% and 50%, respectively. In a lagging world economy, where many would expect entertainment companies to be suffering, it is worthwhile to look into how Disney has enjoyed so much success and growth. And for those looking forward, this conversation can provide additional insight into what to expect from Disney's upcoming Q4 earnings.
Just a couple of months back at the end of Q3, Disney reported $1.8 billion in net income and earnings of $1.01 a share. This represented a year over year increase of 31 percent and was well above analyst estimates, being driven by strong earnings and growth across several business units including media networks, parks & resorts and consumer products. In fact, this wide diversification is what has allowed Disney to be so successful recently; Disney owns some of the biggest names in the entertainment world: ESPN, ABC, Disney theme parks, Disney cruise lines, and Pixar, just to name a few. Unlike many entertainment companies, Disney does not solely rely on films, TV, or parks; it is well diversified and relies on its wide reach to create one of the most recognized and popular brands in the world.
In Q3, Disney's studio entertainment division registered a huge jump in profits, thanks to the movie "The Avengers," which grossed more than $616 million in the U.S. and another $844 million internationally, making it Disney's best-performing movie ever by worldwide box office totals and third highest of all time after "Avatar" and "Titanic." While this type of movie should not be expected every quarter, Disney is constantly creating popular movies under a variety of studios, many of which top the charts.
The company's acquisitions of Marvel in 2009 and Pixar in 2006 have boosted company's growth opportunities and increased diversification even more. With Marvel, the company can produce movies with new characters that did not belong to Disney before (Iron Man, Thor, Captain America, etc); with Pixar, Disney can take advantage of technological innovations and creativity in the animation world, which have been helping it to improve the quality of recent animated films released by the company. Undoubtedly, these acquisitions will continue to pay off for Disney in the foreseeable future.
In addition to its various movie studios, almost half of the revenue for the Disney comes from its Media Networks, including ESPN and ABC, both which Disney owns. ESPN has been the top performer for the company for quite some time now, and despite charging the highest subscription fee in the industry, ESPN still dominates when it comes to sports. The Disney Channel, another flagship of the company, recently surpassed Viacom's (VIA) Nickelodeon to become the top-rated channel on cable. Yet even with such rating, the Disney channel is still a small value contributor when compared to ESPN.
But Disney has not stopped there. If analysts are to be believed, Disney could acquire Scripps Networks Interactive (SNI). Scripps networks include popular cable channels Food Network, HGTV, Travel and DIY, and could be a profitable attraction to Disney's current target audience. The deal will not only help it to grow its cable unit by 50 percent, but will also reduce its dependence on ESPN.
Parks and Resorts
The company's parks and resorts division also showed strong growth, with the main reason behind the improved performance being the growth of the Tokyo Disney Resort, the opening of Cars Land (at California Adventure), and the launch of the Disney Fantasy Cruise Line. Additionally, a new park in Shanghai is expected to open within the next few years, and this will contribute additional revenue and diversification to the company's parks and resorts division.
With the economic downtown in the US and Europe, Disney has been ramping up its investments in developing markets, with an emphasis on Asia, hoping to offset potential loses in the rest of the world. Disney's new theme park in Shanghai, China, is expected to be one of the largest theme parks in the world when it is completed. Elsewhere in China, Disney and the Chinese government entered into a partnership this year, along with Internet service provider Tencent, to collaborate on animated movies, shorts, TV shows, and Web videos, allowing Disney additional access to this huge market. In India, the government recently approved a proposal by Disney to invest 10 billion rupees ($181 million) into additional Indian operations. While it remains to be seen how successful Disney's ventures are in these markets, the foundation for success has been created and within the next few years these investments should begin to pay off.
Throughout its long history, Disney has managed to diversify more than perhaps any other entertainment company in history. From film to theme parks to consumer products to TV, Disney has broken into nearly every entertainment segment and the company continues to look for new opportunities. This constant desire for diversification and growth is what has allowed Disney to enjoy so much success in the past, and it is what will allow it to continue this success in the future.
Disclaimer: This article was written by an analyst at Catalyst Investments.