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Disney Is Firing on All Cylinders: Should You Buy?

By Andrés Cardenal – Feb 6, 2014 at 10:35PM

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Disney delivered a blowout earnings report. More importantly, the company is well positioned to continue delivering its magic over years to come.

Disney (DIS -3.22%) reported better-than-expected earnings for the quarter ended on Dec. 28, and the company is showing remarkable strength in its different segments. But past performance is only a prologue to the future; will Disney continue outperforming in the coming years?

The numbers
Sales during the quarter increased by 9%, to $12.31 billion. This was better than the $12.25 billion expected on average by Wall-Street analysts. Earnings adjusted by restructuring charges and other items came in at $1.04 per share, an annual increase of 32%, and comfortably above the $0.92 per share forecasted by analysts.

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

The media networks segment, the company´s biggest one, produced a 4% increase in revenue, and a big jump of 20% in operating income, to $1.46 billion. ESPN was a big contributor in that segment, with both affiliate and advertising revenue performing well during the quarter.

The parks and resorts segment produced a 16% increase in operating income, to $671 million. The consumer products segment delivered a 24% growth rate, to $430 million, in segment operating income, and the interactive segment rose to $55 million versus $9 million in operating income during the same quarter in the previous year.

The studio entertainment segment was particularly 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 bodes well for the company when it comes to future growth opportunities.

The future
Disney is a unique company in the media and entertainment industry as it has the ability to monetize its characters and franchises across multiple platforms over time: movies, shows, theme parks, merchandising etc. Content production is stronger than ever, and that's a key growth driver for the business.

According to Chairman and CEO Bob Iger: "In today's global marketplace big franchise films play extremely well, particularly those with action or family appeal... In fact, of the world's top-20 highest grossing movies of all time, 19 are franchised drivers and almost half of those carried the Disney, Pixar, Marvel or Lucasfilm brand."

The Avengers franchise has been enormously successful for Disney, and the company is proving its ability to generate growing revenues from its characters. Iron Man 3 produced $1.2 billion in global box office revenues, far better than the $632 million generated by Iron Man 2. The same goes for Thor: The Dark World, which has delivered more than $635 million global box office versus $450 million for the first Thor movie.

Frozen has been another spectacular success for the company. The movie has already exceeded $870 million in global box office, even if it has just opened in China and won´t debut in Japan until March 15. Frozen merchandise continues driving strong sales for Disney, and the company is also planning to take it to Broadway.

The streaming revolution
Technological disruption is always a risk to watch, especially when it comes to video streaming technologies and their impact on DVD sales. However, content is king, and Disney is moving in the right direction when it comes to capitalizing the new opportunities provided by streaming.

In November of last year, the company announced an agreement with Netflix (NFLX -1.53%) to bring several original live-action series based on Marvel's characters exclusively to Netflix beginning in 2015. Leaving short-term financial considerations aside, both companies have a lot to win from these kinds of deals.

Marvel Studios is getting the opportunity to produce content without the typical scheduling and advertising limitations that come with traditional TV; programming does not need to be massively popular to be successful on Netflix. As for Netflix, the deal is a no-brainer, as it provides valuable original content from high-quality producers like Disney and Marvel, a key differentiating factor in the business.

At the end of the day, streaming means more flexibility and commercial venues for content producers, and Disney remains remarkably well positioned to thrive under the new technological paradigm.

Bottom line
Disney delivered a blowout earnings report for the last quarter. More importantly, the company continues proving its unparalleled ability to generate widely successful content, and building the foundations for long-term growth. This unique business will continue delivering its magic for years into the future.

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