Does Mickey Need Help?

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If you have kids, you may have run across the show Mickey Mouse Clubhouse. In it, there is a character named Toodles that comes when Mickey needs help. The company behind Mickey is, of course, Walt Disney  (NYSE: DIS  ) , and if Toodles were real, the company might need to call for help with three particular problems that threaten the entertainment powerhouse.

Sometimes the problem is as obvious as the headline
Many amateur investors will look just at the headline in a company's earnings report to try to determine what the future holds for the stock. While this can be a foolhardy practice in general, in Walt Disney's case the company's week earnings-per-share growth is just the first issue that should give investors pause.

In Disney's most recent quarter, the company reported diluted EPS growth of 13%. Under normal circumstances this would be an excellent growth rate and reason for investors to cheer. However, Disney peer Comcast (NASDAQ: CMCSA  ) reported better than 40% earnings growth, and Time Warner (NYSE: TWX  ) posted a 20% increase.

While it's true that this is only a single quarter comparison, there are additional issues that suggest Disney's underperformance may continue.

The worldwide leader and the laggard
The second issue facing Disney has been a consistent theme over the last year or so. The company has arguably one of the strongest brand names with ESPN but seems to consistently lag its peers when it comes to the ABC Network.

This relationship held true in the current quarter, when the strength of the ESPN network was offset by continued weakness at ABC, and the combination generated a cable-network revenue increase of just 1%. By comparison, Comcast's NBC cable revenue increased by 4%, and strength from both Turner Broadcasting and HBO led Time Warner's 5.5% revenue increase.

Too much of a good thing?
Sometimes a perceived strength can quickly become a weakness if the company is unwilling to innovate. One challenge that may face Disney over the next few years is the fact that many of the company's upcoming movies are sequels.

Admittedly, in 2013, five of the leading box office films were all sequels. With the rise of streaming services like Netflix, Amazon Instant Video, Redbox Instant, Hulu, and more, however, consumers are becoming increasingly picky about what they go to see at the theater.

Part of the challenge for many moviegoers is the fact that sometimes sequels don't live up to the original movie's popularity. Given the fact that it is significantly more expensive to see a movie in the theater versus waiting to rent it at a local Redbox or stream it online, it's possible that Hollywood could be going into sequel overload.

Connected to this challenge is the fact that Disney's ever-popular Pixar Studios won't be releasing a new movie in 2014 due to delays. This means comparisons for the company's movie division will be difficult without these almost sure hits to rely on.

Final thoughts
While it's true that none of these three challenges necessarily mean that Disney is in imminent danger, investors may start to realize that Comcast or Time Warner could represent a better near-term value.

All three companies pay a yield between 1% and 2%; however, Disney carries the highest P/E ratio of the bunch at more than 19, combined with the lowest yield at roughly 1%. Considering that the stock is relatively expensive compared to its peers, investors may want to wait for a better buying opportunity to emerge.

The war for your entertainment dollars
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.

Read/Post Comments (5) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 02, 2014, at 4:13 PM, vollbarry wrote:

    Really?? Disney had the #1 and #2 movies of 2013. How many movies did Comcast have in the top 100. Disney's theme Parks are adding Avatar,

    and Iron Man Adventures. What is Time Warner adding to their Theme Parks? When are they adding a Theme Park to China. Iron Man 3 $1.2 Billion. Iron Man 2 $624 million. Iron Man 1 $585 million. Sequels apparently work for Disney. Can't wait for the Star Wars sequels. #2 movie of 2013 was Frozen. Not a sequel. But it was a Disney Film. How's the interactive game division going over at Comcast? Is it growing like Infinity? Many people are saying in the future content will be king. Can you compare Time Warner's content to Disney?

    Disney 2012 EPS $.78, 2013 EPS $1.04. That's a 33% increase not 13%.

    Comcast 2012 4th Qt EPS $.58, 2013 4th Qt $.74

    28% increase not 40%.

    Time Warner 4th Qt 2012 $1.22, 2013 4th Qt $1.08

    11% drop in earnings!

    Motley gives Time Warner and Comcast 2 star ratings. Disney gets a 5 star. Disney was recognized by Yahoo Finance as company of the Year in 2013. Google Finance gave Disney a perfect score. The only company to receive one. Cramer just gave Bob Iger his Golden Bull Award as best company CEO.

    Other than horrible customer service, what is Comcast known for?

    Please check your facts before publishing.

  • Report this Comment On March 02, 2014, at 4:28 PM, asmith133476 wrote:

    I am just curious as to where the numbers came from, I have seen in every other article that I have read this year, that Disney earnings were up 32-33% quarter to quarter. not sure where the 13%came from is that from the quarter before?

  • Report this Comment On March 02, 2014, at 5:34 PM, HoosierRube wrote:

    Other then the numbers being way wrong, what was the point about sequels?

    He begins by saying 5 of the leading box office movies in '13 were sequels he ends with 'sequels' are a problem.

    This is one confused ramble.

  • Report this Comment On March 02, 2014, at 7:10 PM, DoctorLewis4 wrote:

    Good luck with owning stock in two of the most hated companies in the U.S. Ask anyone who has ever dealt with customer service at Time Warner or Comcast. There is a reason more people are cutting the cord.

  • Report this Comment On March 02, 2014, at 11:22 PM, arbeitslos wrote:

    "...there are additional issues that suggest Disney's underperformance may continue." Uh... you lost me right there. By what metric does this cash making machine driven by the brilliant Bob Iger underperform?

    Tongue in Cheek Disclaimer: I literally just returned from Disneyland six hours ago, and will buy my last souvenir of the trip on Monday after the market opens. I've been riding this pony since Marvel was purchased, and have enjoyed learning about the company and adding to my holdings since.

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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