With Avengers: Age of Ultron already in cinemas as the big release for the summer and a new film in the Star Wars series, Episode VII: The Force Awakens, scheduled for a Christmas release, Walt Disney Co (DIS, Financial) seems poised to have another good year for its studio entertainment business segment. The company is much bigger than its publicly traded rivals 21st Century Fox Inc. (FOXA, Financial) and Time Warner Inc. (TWX, Financial), or even the now privately owned NBC Universal. Its businesses are split among different consumer discretionary segments and the stock currently trades very close to its all-time high price. Let us take a deeper look to see if the stock is attractive at its current price levels.
Strength of businesses
In the latest quarterly results announced, the company has performed well on almost all fronts, be it revenue or earnings or cash flow. The theme parks and resorts aspect of the company is doing very well, gaining in both revenues and profits, as is the merchandising and consumer products segment. However, the company’s biggest segment, cable networks and broadcasting, was in a spot of trouble, with the revenue rising in double digits and the segment still making a loss. In contrast was the smallest segment of the company, interactive, which saw a decline in revenues but a massive jump in income. The studio entertainment segment was the only one that saw a decline in both revenues and income on a year-on-year basis.
Media networks segment
The cable networks part of this segment seems to be going through a bad time. Rising costs of production and programming for the ESPN sports channel also negatively affected earnings. However, as an extremely popular sports channel, ESPN commands a sizeable and loyal group of demographic constituency, and rising rates from advertising spots should set things in balance again sooner or later.
Direct-to-consumer content providers want to separate popular channels like ESPN from channel bouquets to allow customers to mix and choose the cable channels they want, and if that were to happen, Disney would lose a steady stream of income. Recently, Disney has taken Verizon Communications Inc. (VZ, Financial) to court over such a move by the latter, so this disruption of revenue may not happen in the foreseeable future.
Studio entertainment segment
According to analysts, Disney did not bring anything to the box in the last quarter that matched up to its release of Frozen in late 2013, a massive hit, and the subsequent merchandise sales. Given the success that the latest Avengers installment is already seeing and the great expectations from the Star Wars offering in December this year, based on the excitement created by the trailers, analysts expect this segment to perform well again, in sync with the box office.
Parks and resorts segment
Disney’s theme parks and resorts are a continuing source of steady growth for the company, with additions and changes constantly being made to keep their appeal fresh. The company also expects to open its new resort in Shanghai in the spring next year. As one of Disney’s biggest projects ever, it could open the door for international operations in a big way.
Conclusion
The company may have some minor hiccups along its story, such as a temporary decline in revenue or income from one segment or another. But from an overall long-term perspective, it is difficult to deny that Disney is a great company, with a diverse range of product offerings that connect with consumers on an emotional level. Even at the current elevated levels, we strongly recommend a BUY.
