The Ultimate Rule Maker: Disney

Being called a Mickey Mouse operation is often a disparaging remark -- but not for Disney (NYSE: DIS). The family entertainment giant has earned those ears lately. Let's go over a few of the fiscal 2006 highlights to get you up to speed.

• Disney generated $4.8 billion in free cash flow.
• Diluted earnings soared nearly 35%, to hit $1.64 per share.
• Revenue clocked in at $34.3 billion, with all four segments (media networks, parks and resorts, studio entertainment, and consumer products) showing significant improvement in operating income.

Three months into fiscal 2007, things have only gotten better. Disney kicked off the year by posting a 43% surge in profitability. Most major studios are lucky to sell 130 million DVDs in any given year, but Disney did that in its December quarter on the retail strength of The Pirates of the Caribbean: Dead Man's Chest and Cars. Some pretty amazing things can happen when you have the two top-grossing movies of the 2006 calendar year in your portfolio.

Not just some Goofy Rule Maker
Disney's hot, but that obviously isn't enough to make a stock a quality Rule Maker. Let's go over some of the trademarks of Rule Makerhood, and see how the House of Mouse stacks up.

Have a strong, well-known brand that becomes increasingly relevant in our lives.
You bet. Disney runs the highest-grossing theme parks in the world. It's the one brand that should come to mind when you think of family entertainment. It was starting to teeter a bit in the realm of theatrical animation, but that should be fixed by its $7.5 billion acquisition of Pixar.

Make mass-market products or services that are purchased repeatedly.
I already covered those 130 million DVDs, but Disney's wares have also been brisk sellers on the digital front. Disney has sold 20 million television show downloads and 2 million films since setting up camp on Apple's (Nasdaq: AAPL) iTunes video store. On the consumer-products side, has anyone here never seen -- or owned -- a stuffed Mickey Mouse doll? Park yourself outside a Disney World turnstile and watch families walk out with Disney balloons, pirate patches, and princess costumes.

Make products that are easily accessible and convenient to consumers.
ABC is free to anyone with a television and rabbit-ear antennas. Disney makes a mint on advertising, thanks to hit shows like Desperate Housewives and Grey's Anatomy. ESPN is the global juggernaut in sports programming. Digital downloads are cheap, and its Disney Stores retail empire -- now run by Children's Place (Nasdaq: PLCE) -- is only a shopping mall away.

Have very high margins and sales growth.
Revenues have grown by 50% over the past four years, yet net income has more than doubled, and free cash flow has nearly quadrupled in that time. Disney clocked in with 19% in segment operating margins last year. That may seem puny compared to the 24% operating margins posted by Viacom (NYSE: VIA), but it's better than what other media conglomerates like Time Warner (NYSE: TWX) and Sony (NYSE: SNE) have been producing.

Strong balance sheet and low debt.
Until the 2006 acquisition of Pixar, Disney's net borrowings had shrunk during every single year since 2002. Then again, what's $11.1 billion in debt when you're generating $4.8 billion a year in free cash flow?

Have expanding possibilities.
The opportunities to grow are real. So far this year, Disney has announced that it will double the size of its cruise-ship fleet; it's pondering expanding with smaller attraction-based venues all over the world; and it's striking deals to milk more out of it valuable theme-park real estate.

Disney is a global powerhouse, but it's just getting started on so many different levels. It is the family entertainment brand that everyone wants to be. With the world's perpetual supply of children, the Disney well is unlikely to ever run dry on pixie dust and capital appreciation.

Now go back and read about the other contenders for the best Rule Maker. For more stock ideas, visit Motley Fool Inside Value, where we identify industry leaders trading for bargain prices. Try Inside Value free for 30 days.

Disney is an active recommendation in the Stock Advisor newsletter service, as is Time Warner.

Longtime Fool contributor Rick Munarriz enjoys taking his family to amusement parks of all sizes, all over the country -- including Disney World several times a year. He owns shares in Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.