Disney Has a Bright Future

Here's how Disney's stock could see further upside.

Jan 28, 2014 at 6:15PM

Walt Disney (NYSE:DIS) has been a strong performer lately, with the company's stock near recent highs. Its media and parks segments have been firing on all cylinders. As a result, the company has been generating record revenues and earnings for shareholders. Disney can see further upside as the company starts monetizing its extremely lucrative portfolio of intellectual property.

Strong numbers driven by networks
In fiscal 2013, Disney's top-line revenues increased 7% to $45 billion. And driven by record profits, the company's diluted EPS increased 8% year over year to $3.38. Disney is also creating value for shareholders as well; the company bought back $4.1 billion worth of stock during the year, and in the current year intends to buy back $6 billion to $8 billion of stock as well. This is a result of its free cash flow, which has been growing rapidly. Disney's free cash flow for the fiscal year increased 59% to $6.7 billion. 

The key driver behind Disney's stellar financial metrics has been the company's media networks business driven by ESPN and ABC. Media revenues increased 5% year over year to $20.4 billion, and segment operating income increased 3% to $6.8 billion.

Owing to the continued success of ESPN and ABC Networks, Disney's high-margin media segment makes up roughly 45% of total Disney revenues but contributes roughly 65% to its segment operating income.

ABC Networks has had good success lately, with shows like Marvel's Agents of S.H.I.E.L.D. and Scandal doing very well. ABC Studios sold some of these shows in more than 100 markets around the world.

In addition, Disney struck a deal with Netflix (NASDAQ:NFLX) to create several live-action series and miniseries exclusively for Netflix. The collaboration of these two firms has been great lately. Earlier in 2013, Netflix struck a big deal with Disney to add first-run premium pay content to air exclusively on Netflix.

ABC Studios and Marvel will create four serialized shows using Marvel's popular characters, spanning a number of years for Netflix's global member base of more than 40 million. As Netflix is leaning toward original shows, Disney will get more orders for building shows in the future exclusively for Netflix. And if some of these shows are successful on Netflix, Disney can possibly create feature films based on these characters.

Great lineup
In the last quarter, ESPN's ad revenues were up 9%. Ratings for ESPN were up as well, driven by NFL, MLB, and college football. ESPN has locked up major sports rights for the next decade, and will continue to be the leader in sports programming. More than 100 million sports fans tune in to watch ESPN every week, and the average fan spends about seven hours a week on ESPN channels.

However, there is some competition from Twenty-First Century Fox's (NASDAQ:FOXA) Fox Sports. Fox Sports acquired a 50% stake in the joint venture with ESPN in Asia in late 2012, and Fox Sports 1 in the U.S. is getting momentum. Fox Sports 1 is charging cable companies a lot less compared to ESPN, as it tries to gain more viewers. ESPN still has a lot more viewers and very compelling must-have content, however.

In Disney's studio business, the company saw growth after declining revenues for two years. Revenue growth in studio entertainment was primarily due to improved theatrical performance worldwide and greater TV distribution.

Marvel Studios had a great run releasing a number of big movies in recent years, including The AvengersIron Man 3, and Thor: The Dark World. The studio is gearing up for the release of Captain America: The Winter Soldier and Guardians of the Galaxy in 2014 as well.

Disney's acquisition of Lucasfilm will start paying dividends soon, too. The company is set to release Episode 7 of Star Wars as the beginning of a new trilogy in December 2015.

Theme parks are delivering
Over the last three years, Disney has invested more than $10 billion in parks and resorts. These large investments in new property and resorts are starting to show positive results on Disney's earnings.

In the last quarter, revenues from the parks segment were up 8% and operating income was up 15%, driven by the company's domestic parks and resorts business. Operating margins from the company's parks and resorts expanded from 14.7% in fiscal 2012 to 15.8% in fiscal 2013.

Attendance at Disney resorts across the globe was up 2% in 2013, but the occupancy rate stood at 80% worldwide, which is a decline from the occupancy rate of 82% in 2012. However, the occupancy rate decline has largely been a function of newer room capacity, than a decline in visitors. Disneyland Resorts delivered record attendance, revenue, and profitability.

Going forward
Disney is in the pole position to drive value for long-term shareholders owing to its healthy free cash flow generation. Disney owns one of the most lucrative portfolios of intellectual properties in the world, and the company has built up a tremendous lineup of studios and content producers through acquisitions. 

Disney will open its Shanghai Disneyland park at the end of 2015, enabling the company to participate in economic expansion from the second-largest economy in the world. Disney's big share repurchase program will drive earnings growth, and the company's unmonetized content from Lucasfilm and Marvel will be big value drivers for the company in the next two years. 

The battle to be king of your living room
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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