Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks to buy as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle. This week an Inner Circle members asked us about one of the world’s best known entertainment companies. Walt Disney now has five separate businesses and continues to add to its assets. Pat examines the company’s entertainment empire and the impact of several recent high-profile acquisitions. He also consider the company’s financial outlook and whether the shares can continue their recent rise. Q: What is your opinion about Disney? Thanks. A: Walt Disney Co. (symbol DIS on New York (Shares outstanding: 1.7 billion; Market cap: $144.3 billion; www.thewaltdisneycompany.com), is an entertainment and media company that focuses on families. It’s also the world’s largest theme park operator. In 1991, Dow Jones added Disney to its widely followed Dow Jones Industrial Average of 30 major U.S. stocks. The company has five main business segments: i) Media Networks (45% of revenue) includes ABC Television, ESPN, the Disney Channel, ABC Family and SOAPnet (a cable channel devoted to soap operas). Disney produces films and television programs under the ABC Studios, Buena Vista Productions and ABC Family Productions labels. It also holds equity interests in Lifetime Entertainment Services (a women’s cable channel) and A&E Television Networks. ii) Parks and Resorts (31% of revenue) includes the Disney Cruise Line, 12 Disney Vacation Club resorts and Adventures by Disney (which plans guided international trips for families). Disney’s resort locations include Disneyland Resort in California, Walt Disney World Resort in Florida, Tokyo Disney Resort, Disneyland Resort Paris and Hong Kong Disneyland. iii) Studio Entertainment (13%) distributes feature films, mainly under the Walt Disney Pictures, Pixar, Touchstone, Marvel and Lucasfilm banners. The company also has a deal to distribute live-action films by DreamWorks Studios. iv) Consumer Products (8%) sells a wide range of goods, from clothing, toys, home decor and books and magazines to food and beverages, stationery, electronics and fine art. This segment also includes Disney Publishing Worldwide, the Disney Stores retail chain and Marvel Comics. v) Interactive Media (3%) manages the company’s Internet activities, including e-commerce web sites such as disneystore.com. This division also makes video games and software for mobile devices.
Hit movies and higher theme park attendance offset lower network advertising revenue
The company continues to add to its high-quality brands, mainly through acquisitions. In December 2012, it paid $4.1 billion ($2.2 billion in cash and $1.9 billion in shares) for Lucasfilm, producer of the hugely successful Star Wars and Indiana Jones films. Disney plans to develop several new movies, TV shows and theme park attractions based on these properties over the next few years. Another recent acquisition is Maker Studios, a leading provider of content for the YouTube video website. Disney will pay $500 million for Maker when the deal closes later this year. Depending on future performance targets, the company may have to pay an additional $450 million. Meanwhile, Disney earned $1.9 billion in its 2014 second quarter, which ended March 29, 2014, up 26.7% from $1.5 billion a year earlier. Due to fewer shares outstanding, earnings per share gained 30.1%, to $1.08 from $0.83. If you disregard unusual items, per-share earnings jumped 40.5%, to $1.11 from $0.79, easily beating the consensus estimate of $0.96. Revenue rose 10.4%, to $11.6 billion from $10.6 billion, also beating the consensus forecast of $11.2 billion. Disney continues to benefit from several successful new films, including Frozen, Thor: The Dark World and Captain America: The Winter Soldier. Higher attendance and prices have also boosted results at its theme parks, and the company is collecting higher distribution fees from cable and satellite providers. That’s offsetting lower advertising revenue at its cable and TV networks. The company holds cash of $4.1 billion, or $2.40 a share. Its $10.9 billion of long-term debt is 7.6% of its market cap. Disney will release several promising movies in the next two years, including Guardians of the Galaxy, Avengers: Age of Ultron and Star Wars: Episode VII. In addition to their likely box office success, these films will generate sales of related products, such as toys and video games that should spur Disney’s long-term earnings. The stock has gained 28% in the past year. The $0.86 dividend yields 1.0%. In the Inner Circle Q&A, Pat examines Disney’s recent acquisitions and especially whether increased online viewing will offset the expense of buying YouTube provider Maker Studios. He also considers the company’s earnings outlook for the rest of 2014 and whether the share price can continue to rise. He concludes with his clear buy-hold-sell advice on this stock. (Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members What do you think will add more to the growth of entertainment companies in the coming years—media content such as movies, TV and YouTube, or active entertainment like theme parks and resorts?
