Disney: All Is Well In The Kingdom, Except Too Much Dependence On ESPN

Disney: All Is Well In The Kingdom, Except Too Much Dependence On ESPN

Disney: All Is Well In The Kingdom, Except Too Much Dependence On ESPN

The Walt Disney Company (NYSE:DIS) stocks have been one of the Dow’s best-performing stocks in 2012. The Company’s stock has been up by around 30%[1] as of August this year, trailing only Bank of America Corp (NYSE:BAC) among Dow components.

Just a couple of months back, Disney reported $1.8 billion in net income and earnings of $1.01 a share for the quarter ending in June. The earnings were up by 31 percent and were well above the estimates from the analysts. The Company’s strong quarterly earnings were driven by growth across several businesses, including media networks, filmed entertainment, and parks & resorts, as well as consumer products. Disney’s studio entertainment division, registered a huge jump in profits, all 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.”  An interesting fact here is its movies business only account for about 10 percent of its total value, due to small margins.

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Disney: All Is Well In The Kingdom, Except Too Much Dependence On ESPN

All this is good, but one fact that should be kept in mind by Disney’s bosses is that almost half of the revenue for the company comes from its Media Networks, which is comprised of ESPN and related channels. ESPN has been the top performer for the company for quite some time now. Despite, charging the highest subscription fee in the industry, ESPN still dominates when it comes to sports. Disney Channel, another flagship of the company, recently surpassed Viacom, Inc. (NASDAQ:VIAB)’s Nickelodeon to become the top-rated channel on cable.  Even with such ratings Disney channel is still a small value contributor when compared to ESPN.

[1] CNN Money

The company’s parks and resorts division also showed strong performance, with profits rising 21% to $630 million. The main reason behind the improved performance was the growth from the Tokyo Disney Resort, the opening of Cars Land (California resort), and the launch of the Disney Fantasy at Disney Cruise Line.

The acquisitions of Marvel in 2009 and Pixar in 2006 have boosted the company’s growth opportunities. Because of Marvel, the company can make movies with a lot of new characters that did not belong to Disney before (e.g., Iron Man, Thor, and Captain America). Pixar’s technological innovations and creativity have been helping it to improve the quality of many recent animations released by the company. These two acquisitions will continue to pay off for Disney in the foreseeable future. And if analysts are to be believed, Disney could acquire Scripps Networks Interactive, Inc. (NYSE:SNI) [1]. Scripps, with its popular cable channels Food Network, HGTV, Travel, and DIY, will be a profitable attraction to Disney’s current target audience of adult women, who as of now watch shows like Desperate Housewives and Dancing’ with the Stars on Disney’s ABC. The deal will not only help it to grow the cable unit by 50 percent, but will also reduce its dependence on the sports channel.

Disney’s new theme park in Shanghai, China, is expected to be one of the largest theme parks in the world and is also responsible for bringing much of the Foreign Direct Investment (FDI) to Shanghai.  Shen Danyang, a spokesman for the Ministry of Commerce, told to a local press that most of the FDI came largely because of the investments put in position for the Shanghai Disneyland[2].  Talking about China, Walt Disney, along with Chinese government, entered into partnership this year, with Internet service provider Tencent to collaborate on animated movies, shorts, TV shows, and Web videos. Like many US multinationals, Disney has been ramping up its investments in Asia to overcome the slump in Europe and the US.  Recently, the Indian government approved a proposal by a unit of The Walt Disney Company (NYSE:DIS) to invest 10 billion rupees ($181 million) in expanding its Indian operations.

Not all has been going well for the company, in a renegotiated agreement between The Walt Disney Company (NYSE:DIS) Studios and DreamWorks Studios, Disney will no longer release movies from DreamWorks everywhere around the world. As per the new deal, Disney will release movies produced by DreamWorks in the U.S., Canada, Latin America, Australia, and most of Asia, while other regions, like Europe, Africa, and the Middle East, will now be handled by Mister Smith Entertainment, a new company headed by Summitt Entertainment co-founder David Garrett[3].

Coming to competition, Six Flags Entertainment plans on combining its Wild Safari animal preserve and Great Adventure amusement park in Jackson to create a single attraction, which will be the world’s largest theme park and about 10 acres larger than Disney World’s Animal Kingdom in Florida. Also, the competition is likely to develop in the media segment as rivals invest more in their respective sports channels, Comcast – NBC’s bid for Olympics, is a good example.

Despite a few glitches, Disney is on the right track.  This is evident from the fact that, ESPN is now charging somewhere around $5.15 per subscriber per month. This implies that investors can expect continued strong

[1] The Steet

[2] Forbes

[3] LA Times

performance from The Walt Disney Company (NYSE:DIS) as far as its affiliate fee is concerned. Also, the success of The Avengers is likely to spread to the next few quarters as Disney earns a significant portion of its filmed entertainment revenues from DVD and Blu-ray sales. The company has also made a lot of strong investments in countries like India, Russia, and China with some of these investments already starting to pay off and will continue to drive growth for the company in the future.

One more fact, that lends credibility to the 90 year old company, up till now it has had just 6 CEOs. This means each CEO stayed with the company for an average of 15 years. This is rare in the corporate world and signifies stability, which many companies would love to have

A closing fact: until last year, Steve Jobs was also a board member as well as shareholder of the company. Jobs, who passed away in October, had been on Disney’s board since May 2006, when Disney bought his company Pixar.

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