Disney Offers More Room for Gains

Considering its exceptional quality, strong financial performance, and reasonable valuation, Disney looks positioned to continue to deliver big gains for investors in the coming years.

Apr 5, 2014 at 8:00AM

Dis Image

Source: Disney.

After rising by more than 300% over the last five years, Walt Disney (NYSE:DIS) has delivered spectacular returns for investors. More importantly, considering the company's business quality, strong momentum and reasonable valuation in comparison to peers such as Comcast (NASDAQ:CMCSA), Twenty-First Century Fox (NASDAQ:FOXA), Time Warner (NYSE:TWX), and CBS (NYSE:CBS), Disney looks well positioned to continue delivering magical gains in the years to come.

The magic is still intact
Disney is a fairly unique company in the entertainment industry. The company benefits from unparalleled brand power and extraordinary intellectual properties, and it has the ability to monetize its assets via multiple platforms over time: movies, shows, theme parks, merchandising, etc.

Success in one area generates growth opportunities in other segments, so big winners like Frozen bode remarkably well for the company's prospects in the years ahead.

Disney is clearly firing on all cylinders lately, sales during the fourth quarter of 2013 increased by 9%, to $12.31 billion, while adjusted earnings per share during the quarter jumped to $1.04 per share, a huge increase of 32% versus the prior year.

Performance was strong across the board in terms of profitability; the company's five business segments delivered double-digit growth in operating income and margin expansion compared to the fourth quarter of 2012. Total segment operating income increased by 27%, to $3.02 billion versus $2.4 billion.

The media networks segment produced a 4% increase in revenue and a big jump of 20% in operating income, to $1.46 billion. This was mostly due to both strong affiliate and advertising revenues from ESPN.

The parks and resorts segment delivered a 16% increase in operating income, to $671 million on the back of a 6% growth rate in revenues. Sales in the consumer products division grew 11% during the quarter, and operating income in that segment jumped by 24% to $430 million.

The studio entertainment segment was remarkably strong, with sales growing by 23%, to $1.9 billion during the quarter, and operating income increasing by a whopping 75% annually, to $409 million. This is not only important in terms of financial contribution, but it also sets the stage for further growth in the middle and long term.

Fair valuation
When comparing valuation ratios like dividend yield, P/E, forward P/E, and price to free cash flow, Disney looks reasonably valued in comparison to peers such as Comcast, Twenty-First Century Fox , Time Warner, and CBS, especially considering the company's superior quality and financial performance.

Dis Competitors

Data source: FinViz.

Comcast delivered an increase of 6.2% in total revenues during the fourth quarter of 2013, while operating income increased 10.7% during the quarter and adjusted earnings per share jumped by a strong 26.9% versus the prior year. Sales in the cable communications segment increased 5.2%, and revenues at NBC Universal grew by 7.5%.

Twenty-First Century Fox announced a 15% increase in sales for the quarter ended on December 31. On the other hand, the company suffered a decline of 4% in operating income before depreciation and amortization -- OIBDA -- due to increased investments and falling margins during the quarter. Earnings per share came in at $0.43, a 4.4% decline versus the prior year.

Time Warner reported a 5% increase in revenues during the fourth quarter of 2013 to $8.6 billion. Margins declined versus the prior year, though, so operating income declined 9% to $1.8 billion. Adjusted net earnings per share grew by 1% to $1.17, versus $1.16 per share in the same quarter of the prior year.

CBS reported a 6% increase in sales for the last quarter of 2013 to $3.9 billion, while operating income grew 9% to $793 million. Adjusted earnings per share grew by a healthy 22% versus the prior year to $0.78, as the company generated higher profit margins and a reduced share count via buybacks.

All in all, Disney is outperforming other big players in the entertainment industry, and the company is positioned for growth in the years ahead. Keeping these considerations in mind, current valuation looks quite reasonable for such a high-quality company.

Bottom line
Disney is an exceptional player in the entertainment industry due to its brands, intellectual properties, and multiple interrelated business platforms. From a financial point of view, the company is firing on all cylinders, outgrowing the competition, and trading at reasonable valuation ratios. This fun ride is far from over for investors in Disney.

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Andrés Cardenal owns shares of Walt Disney. The Motley Fool recommends and owns shares of 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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