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Last week I highlighted Home Depot and how its recently announced $17 billion share buyback program would possibly affect the company moving forward. Today, I'd like to stick with how a company's capital allocation may affect long-term shareholder value. With that in mind, let's take a look at how Walt Disney's (NYSE: DIS ) purchase of Lucasfilm has the potential to provide great returns to investors and one rising threat to Mickey's dominance.
But first, Disney has performed well thus far in 2013, and at this time investors would have been better suited buying shares of Disney as opposed to a typical index fund. While the Dow Jones Industrial Average (DJINDICES: ^DJI ) is currently up an impressive 9.87%, shares of Disney have risen 15.26% year to date. That kind of performance has also made Mickey the third best performing Dow component of 2013.
The company has a strong diversified revenue stream, which has proved itself capable of overcoming economic downturns. In its most recent quarterly filing, Disney reported that its parks and resorts unit brought in $3.3 billion, or 30% of the total quarterly revenue; media networks attracted the most revenue, with $5.1 billion, or 45% total quarterly revenue; and studio entertainment had revenue of $1.5 billion, or 13% of the total.
Disney's studio entertainment revenue is the only area that experienced revenue decline on a quarterly year-over-year basis. The inconsistent nature of the movie industry may be one reason Disney has purchased a number of known entertainment franchises over the past few years. Back in 2010 the company bought Marvel Entertainment, best known for the Marvel Comic books and characters the company has developed over the years. Marvel was a well-established brand, from which Disney could easily take known characters and stories and turn them into movies, merchandise, and, most importantly, cash with very little effort and risk.
But anytime something new is attempted, hiccups are to be expected. Disney's Marvel misstep was the John Carter debacle, but things quickly turned around, and the idea of taking known characters has played out very well for Disney in The Avengers.
With the purchase of Lucasfilm, Disney now has another franchise that is not only well established and known throughout the world but also has a ravenous fan following. When Disney made the purchase for slightly more than $4 billion, it announced that Star Wars: Episode VII will be released sometime in 2015. It has been estimated that the previous six episodes have brought in more than $30 billion in revenue.
If Episode VII performs similarly to the others, this one movie -- if the cost of producing the film doesn't run over $1 billion -- could essentially pay for the entire Star Wars franchise. From the get-go, the film already seems to be building steam and could perform as well as, if not better than, the previous six episodes. This week it was announced that the original actors who played Han Solo, Luke Skywalker, and Princess Leia will return for the newest film. Investors enjoyed the news and pushed shares of Disney higher by 1.9%.
A storm on the horizon
While Disney's movie studio seems that it may just be heating up, the company's media networks may soon be showered with a cold bucket of ice. This past week it was announced that News Corp.'s (NASDAQ: FOX ) Fox is developing its own all-sports network to compete with Disney's dominant ESPN franchise. ESPN is no longer the only kid on the block, and Fox's sports channel will just be another option in a long list of sports-focused channels, but Fox has proved in the past that it can build a brand from scratch and, while perhaps not becoming the dominant force, can at least make a difference as a smaller but still powerful player.
When asked about the new competition, ESPN President John Skipper said, "They've got the resources of News Corp., and the willingness that Fox has shown in the past to take big bets and to create a difference." But he added: "We like our hand. We just have to play it well."
For the next few years, Disney and ESPN don't have very much to worry about in terms of competition from Fox, but investors need to keep an eye on general sports content costs and which broadcaster is winning the contracts. If ESPN begins losing the rights to air major sporting events, not only will the franchise take a hit, but Disney's largest revenue-producing unit might stop growing or even begin shrinking.
It's easy to forget that Walt Disney is more than just the House of Mouse. True, Disney amusement parks around the world hosted more than 121 million guests in 2011. But from its vast catalog of characters to its monster collection of media networks, much of Disney's allure for investors lies in its diversity, and The Motley Fool's new premium research report lays out the case for investing in Disney today. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. So don't miss out -- simply click here now to claim your copy today.