Is Disney About to Add a Little Magic to Your Portfolio?

As earnings approach, some investors might be worrying that with Disney shares at all-time highs, they might not have much room to run. With this thought in mind, would the Foolish investor be better off with DreamWorks or Lions Gate or can Disney keep the magic going?

Daniel Jones
Daniel Jones
Jul 17, 2014 at 1:00PM
Consumer Goods

Source: Disney

Heading into earnings on August 5, some investors might be wondering what to do with shares of The Walt Disney Company (NYSE:DIS). With shares of the entertainment giant trading just off of their all-time highs, it might be awfully tempting for investors to ditch them and opt instead for another entertainment company like DreamWorks Animation SKG (NASDAQ:DWA) or Lions Gate Entertainment (NYSE:LGF-A). However tempting it may be though, now might actually be the worst time to ditch the business.

Mr. Market has high expectations for the world's happiest company!
For the quarter, analysts expect Disney to report revenue of $12.16 billion. If this forecast turns out to be accurate, it will represent a 5% rise from the $11.58 billion that management reported for the same quarter last year. If the past is any indication of the future, it's likely that this increase in sales will be driven largely by the company's parks and resorts segment and its consumer products segment.

  Forecasted Last Year's
Revenue $12.16 billion $11.58 billion
Earnings per Share $1.16 $1.03

Source: Yahoo! Finance

From a profitability perspective, analysts have even greater expectations for Disney. For the quarter, analysts anticipate that management will reveal earnings per share of $1.16. This, if it comes to pass, will imply a 13% jump in profit compared to the $1.03 the company reported during the third quarter of 2013. In part, such a large increase will stem from the company's rising sales, but a decrease in share count and, possibly, some reductions in costs will also play roles in meeting these estimates.

Disney's had a great run, but is it time for one of its competitors to shine?
The past few years have been phenomenal for Disney. Between 2011 and 2013, the company saw its revenue climb 10% from $40.9 billion to $45 billion. The two largest contributors to this increase have been the company's media networks segment, which saw its sales climb 9% from $18.7 billion to $20.4 billion, and its parks and resorts segment, which grew its sales 19% from $11.8 billion to $14.1 billion.

DIS Revenue (Annual) Chart

DIS Revenue (Annual) data by YCharts

This growth stands in stark contrast to that of DreamWorks, with sales that barely moved from $706 million to $706.9 million. Even though the success of its Shrek franchise, of which the company released its last installment in 2010, resulted in sales hitting their highest point ($784.8 million) since 2004, management has yet to release a title that has allowed the company to grow. In fact, over the past three years, DreamWorks' feature films segment has seen its sales decline by 9% from $551.4 million to $500.2 million, with its television series and specials segment and consumer products segment left to pick up the slack.

Lions Gate, on the other hand, has been another story entirely. Because of the company's The Twilight Saga and The Hunger Games Trilogy blockbusters, its sales have soared 77% from $1.5 billion to $2.7 billion. According to the company's most recent annual report, the past three years have been particularly good because of the company's motion pictures segment, which reported an 83% jump in revenue from $1.2 billion to $2.2 billion. However, Lions Gate's television production segment also did well as it grew its sales by 13% from $397.3 million to $447.4 million.

Getting to the bottom line!
From a revenue standpoint, Disney has done quite well for itself, but its growth in net income has been even more impressive. Between 2011 and 2013, the entertainment behemoth saw its profit climb 28% from $4.8 billion to $6.1 billion. This partially resulted from a general rise in sales, but a breakdown of the data reveals more specific details.

According to management, the company's segment operating margin (the operating margin of its consolidated operating segments, less any unallocated expenses) came out to almost 24% in 2013. The biggest component of this was the company's media networks segment, which reported a segment operating margin of 33.5%, up from 32.8% two years earlier.

DIS Net Income (Annual) Chart

DIS Net Income (Annual) data by YCharts

Disney's parks and resorts segment and its consumer products segment saw even more impressive improvements over this time-frame, with the former's segment operating margin growing from 13.2% to 15.8% and that of the latter shooting up from 26.8% to 31.3%. These increases in profitability, combined with the business's interactive segment cutting its losses from $308 million in 2011 to $87 million in 2013, significantly improved Disney's bottom line.

Like Disney, Lions Gate has also seen some nice bottom-line growth recently. Over the past three years, rising sales have pushed the company from a net loss of $39.1 million to a gain of $152 million. Unfortunately, DreamWorks hasn't been so lucky. Over a similar time-frame, the company's bottom line declined nearly 37% from $86.8 million to $55.1 million. With stagnant sales, the rise in the company's selling, general, and administrative expenses from 15.9% of sales to 27% of sales more than offset reductions in the company's cost of goods sold.

Foolish takeaway
Based on its performance metrics in recent years, Disney has posted some really impressive results, especially on its bottom line. Moving forward, it's unclear if management can continue to grow the business, but with the company's long-term track record, it might be foolish, not Foolish, to bet against the business. However, for the Foolish investor who is looking for something a little smaller with the potential for faster growth, Lions Gate might make for a good play.