Investing guru Peter Lynch did an experiment in which he let young kids choose their own investments and then reviewed the results over time. The kids picked companies they knew, companies with good brand awareness and products the kids themselves used and liked. The conclusion was that the kids' investments did quite well over time, comparable to and often better than the performance of more "sophisticated" managed funds. That's what it feels like to be an investor in Disney (NYSE:DIS). It doesn't take a financial genius to see that Disney makes great products, again and again, across many different segments. The company's recent earnings prove that this strategy is working.
Time Warner (NYSE:TWX) and DreamWorks Animation (NASDAQ:DWA) also posted their earnings recently, with mixed results. While these companies have their respective strengths, they are not the simple-to-understand winning investments that even a kid can see that Disney is. With strong brand awareness throughout the world and while continuing to deliver incredibly successful movies and products, Disney continues to prove itself to the dismay of those who have yet to invest in the company. Here's how the company is doing it.
I'm not embarrassed to say that Frozen was one of the best movies I've ever seen
Disney's latest blockbuster hit, Frozen, has been named the highest-grossing animated movie of all time. Disney animators spent hundreds of hours perfecting the finest details, such as the characters' hair and the shards of ice in certain scenes. The sound scoring was done with world-class singers and songwriters. Overall, the movie was incredible.
The work paid off and its no wonder that this kind of delivery has driven profits up for the company this year, even in the quarter after the release of the film in late 2013. Part of this resulted from rising merchandise sales as millions around the world fell in love with the movie and its characters. During the recent quarter, which is the second quarter of Disney's financial year, the company posted revenues up 10% year-over-year to $11.5 billion, with segment operating income up 34% year-over-year to $3.4 billion. Net income itself was up 27%, while free cash flow was up 15%. With these kinds of increases, Disney is preparing itself to have a record-beating year in 2014, even above an incredibly profitable 2013.
With these kinds of box-office revenue numbers, it may seem that companies have an easy time creating these box-office hits. This was not the case with DreamWorks Animation's recent Mr. Peabody and Sherman. Relatively high costs combined with unfortunately poor box-office revenues caused DreamWorks to take a $57 million writedown during its recently reported quarter.
Take me to Disneyland!
The parks and resorts segment continues to be a strong point of Disney's revenues. For this segment, revenues for the quarter increased 8% to $3.6 billion with operating income up 19%. Increased visits and spending at the company's American theme parks in Florida and California drove the segment's revenues this quarter.
Internationally, Disney Resorts is an even more interesting story. For this quarter, international parks and resorts stayed mainly stagnant, as losses at Disneyland Paris offset gains at Disneyland Hong Kong. However, for Foolish investors who have been paying attention, Disney is about to increase its bet on China with its Disney Resort in Shanghai, China coming next year.
Disneyland Hong Kong had been a highlight of the segment in 2013, but mainland China can be very different from Hong Kong. Disney Resort Shanghai, the first resort on the China mainland, is under development and set to open in 2015. This theme park should prove to be a major boon to this segment.
Dreamworks has also stepped up to bet on the theme-park industry in China. The company has partnered with Shanghai Media Group and other local entertainment companies to create Oriental Dreamworks, a joint venture in which Dreamworks Animation holds a 45% stake. Oriental Dreamworks is preparing to compete near Shanghai with a $3.1 billion indoor park that is set to open in 2018.
Foolish final thought: Looking ahead for more growth
More investment in China, especially with the new mainland resort opening next year, is one reason to be excited about what could lead to even more profits for the company next year. Disney's planned release of a new Star Wars series is certainly another exciting point for investors to look forward to in the next couple of years.
Yet aside from the upcoming Star Wars release and expanding profits in China, investors have many other reasons for bullishness on Disney. With great operating profits and continued innovation, it's never a bad time to get back in touch with your inner child to find the companies that make you happy not only as a consumer, but as an investor as well.
Bradley Seth McNew owns shares of Walt Disney. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool 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.