Disney's Diversification: Why This Stock Is a Long-Term Winner

Entertainment and media conglomerate The Walt Disney Company (DIS -0.26%) has much more than just animated films. One of Disney's main strengths is its diverse group of income streams. By creating highly diversified operating segments, the company has set itself up for growth and opportunities for years to come while facing less risk from a single segment declining.

The company's operations include five segments: media (involving movie production, ESPN Network, Disney Channel, ABC Family, and others), parks and resorts (including theme parks and the Disney cruise line), studio entertainment (such as live performances), consumer products (including licensing), and interactive (involving all gaming).

Of Disney's $45.05 billion global revenue in 2013, only half came from the company's most well-known segment, media. This revenue diversification means that Disney faces less risk because of an economic or competitive factor that decreases revenue for a single segment, and results in more chances to expand in multiple markets.

Analyzing the segments
Media accounts for 49% of Disney's operating portfolio, which has come in part from the company owning and growing diversified media networks. For instance, Disney purchased ESPN (the sports network, a big diversification from the classic Disney style of children and family entertainment) and Lucas Films in the last few years. With the purchase of Lucas Films, Disney is now taking advantage of the rights by creating a new TV series based on the popular Star Wars movies that is likely to bring a large revenue stream to the company over the next few years.

Parks and resorts is the next-largest segment for Disney, and one that has shown to be a great profit booster for the company. The company reported a 7% overall revenue increase for 2013 year-over-year, while the parks and resorts segment reported a 9% gain individually. Part of this success comes from the company's ability to keep bringing families to the Disneyland and Disneyworld resorts, both in the U.S. and abroad.

Another highlight is the company's cruise line segment. The cruise industry has seen massive growth over the last few years, with a market of 20.3 million cruisers in 2013 alone. Disney is taking part in this growth, and with travelers making arrangements sometimes as much as a year in advance just to get their preferred spots on Disney cruises, it's clear that demand is high. In the 2013 earnings release call, CEO Iger talked about this growing demand and said that, while the company isn't planning to build a new ship yet, it is continuing to increase routes and itineraries throughout the year to allow for more passengers.

Interactive is the one area in which Disney has not seen growth in 2013, and the only segment reporting a loss in 2013 at $87 million. The loss was steady throughout the year as few games were released, and the one sub-segment of growth came from Japanese mobile gaming. A little help came from the release of Disney Infinity, a console game, in August. However, the company is planning to release Fantasia: Music Evolved, another console game, this year. This should bring a revenue payoff after Disney incurred an expense in 2013 for developing the game. The interactive segment exemplifies how Disney's diversification works to decrease its risk. Even though this segment dropped in 2013, the company as a whole was not majorly affected thanks to its four other strong segments. Whether or not Disney is able to turn this segment around will be something to watch in 2014, but that should not turn investors away from this stock. 

Looking at the industry
Disney is by far the largest player in the industry by revenue and market cap, nearly twice as large as the next-largest company, Time Warner (TWX). The other competitors in the industry include Twenty-First Century Fox (FOXA), and DreamWorks Animation (NASDAQ:DWA).

*Dreamworks does not provide a trailing P/E due to negative earnings,
but a forward looking P/E multiple of 37.91 is provided by Yahoo! Finance.

While Disney may seem to be the highest priced option based on P/E multiples, consider the growth that accompanies this price. Disney was able to produce revenue growth of over 7% in 2013, which compares to 0.2% for Time Warner and -17% for Dreamworks. Or consider the broad amount of revenue streams this price buys investors. The risk that is mitigated for Disney with its five separate segments is something that Twenty-First Century Fox will not be able to replicate with only two distinct segments, media and satellite broadcasting (though the company does have plans to build its first theme park in Malaysia in the coming years). Should an economic shift happen within the media segment, such as competition from China perhaps, Twenty-First Century Fox will face a much more challenging landscape in regard to steady revenue.

Foolish conclusion
With a successful strategy of establishing different income streams, Disney has developed a business model that provides more value along with less risk. On top of this, the company has been able to maintain industry-beating revenue growth in 2013. These are reasons why Disney is an industry leader and it will continue to be.