Walt Disney's (NYSE:DIS) diversified business model (exposure to theme parks) secludes it from secular issues facing the traditional media industry. Disney remains exposed to consumer spending and as such to the economic environment, evident in the company's volatile advertising revenue, theme park visits and box office hits. Disney's acquisitions have strengthened its brands and franchise portfolio, giving the company leverage to deliver high-quality products and services to customers.
Scope for upside in P/E valuation due to strong Parks & Resorts performance
Walt Disney trades at a P/E 2013/14 of 18.4/16.4 compared to its peers' average of 18.5/15.7. Despite the fragile economic recovery, Disney is well positioned to deliver earnings growth on the back of solid performance at the Parks & Resorts and strong affiliate revenue growth. Hence, a BUY recommendation is maintained.
Q2 2013 results driven by strong operating performance
Walt Disney's Q2 2013 reported adj. EPS of $0.79 (+36% YOY, consensus: $0.76) benefited from strong operating income growth (+29%). Sales of $10.5 billion (+10% YOY) was led by steady performance at the Parks & Resorts business (+14% YOY), Studio Entertainment (+13% YOY) and Cable Networks (+15% YOY). However, broadcasting business performance was disappointing, mainly due to lower advertising revenue and higher programming costs. Parks & Resorts business benefited from the increase in guest spending and higher attendance, particularly in domestic operations. Studio Entertainment results gained from the theatrical distribution of Oz The Great And Powerful. The company's operating margin expanded 357 bp YOY to 23.8% on account of strong operating performance, particularly in the Parks & Resorts business. Furthermore, outlook remains positive on Q3 performance on the back of affiliate revenue growth and the strong box office opening of "Iron Man 3."
Secular trend in Parks & Resorts business to boost revenue
Parks & Resorts business should benefit from the incremental revenue coming from Cars Land and Fantasy Land, as well as higher per capita spending. Furthermore, outlook is positive on the company's capex plans for theme parks (Orlando and Shanghai). Additionally, a strong movie slate, merchandise sales, the launch of new cruises and improving trends at the Media Networks (ESPN's affiliate renewals and higher ad revenue) should translate into higher revenue.
Bottom Line: Better pricing and launch of high-margin services to improve margins
Walt Disney's expansion into high-margin digital media content, international subscriber growth at Disney channels and increasing advertising revenue from ESPN should help improve margins, offsetting higher programming costs. In addition, increased scatter pricing, the launch of new cruises (higher margins), better pricing for hotels and cost-reduction initiatives should help generate stable margins in the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.