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Does Mickey Need Help?

By Chad Henage – Mar 2, 2014 at 3:00PM

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Disney seems to be underperforming its peers, and the number of upcoming sequels could be a challenge.

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 (DIS 1.22%), 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 (CMCSA 1.22%) reported better than 40% earnings growth, and Time Warner (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.

Chad Henage owns shares of Comcast. The Motley Fool recommends and 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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