As I said in my last write-up of Disney (NYSE:DIS), there's an element of predictable unpredictability to this company and that came through again this quarter. Like so many other consumer-oriented stocks, though, Disney has been on an absolute tear – more than doubling the performance of the S&P 500 over the past year. While I wouldn't worry about that if I were a long-term holder of Disney (and still planning on being one), valuation is making it appear as though there's a housing bubble for the House of the Mouse.

Studios And Parks Drive A Sharp Rebound In Profits
This was a very solid quarter for Disney. Revenue rose 10% and slightly surpassed the average Wall Street estimate. Growth was led by the parks/resorts business (up 14%) and the studio/consumer business (up 13%), while interactive (up 8%) and networks (up 6%) were hardly shameful.

Profits also came in better than expected, and by a wider margin. Operating income rose 30% atop a 29% increase in segment income, drive a better than three and a half point improvement in margin. Segment income outdid expectations by about 6%, with parks/resort income up 73%, studio/consumer income up almost 400%, and network margins improving (as income rose 8%).

SEE: Zooming In On Net Operating Income

Should This Have Been Such A Surprise?
I'm puzzled by the extent to which sell-side analysts are talking up the positive surprise at Disney relative to their estimates for this quarter. While I don't mean to cast aspirations on a solid quarter for Disney, it does make me wonder a bit about the analysts.

U.S. park and resort revenue was up 15% on a 8% increase in attendance, and margins benefited greatly from that increased through-put. Here's the thing, though – a big chunk of this improvement was due to the timing of New Year's and Easter, and it's not like the calendar is a big secret or anything. Likewise, the improvement in the studio/consumer business doesn't seem so surprising – the company was moving on from the John Carter mess and movies like Wreck It Ralph and Oz The Great And Powerful have been doing well.

More Opportunities For Disney To Be Disney
One of the things that really impresses me about Disney, at least in the resorts/park business, is the commitment to quality and the visitor experience. Six Flags (NYSE:SIX) and Cedar Fair's (NYSE:FUN) regional attractions are all well and good, and Comcast (Nasdaq:CMCSA) has a solid asset with Universal Parks & Resorts, but Disney is a cut above.

Given the recent issues with Carnival's (NYSE:CCL) much-publicized poo cruise, I think Disney can do even more. The company's cruise fleet is pretty tiny next to Carnival and Royal Caribbean (NYSE:RCL), and Disney has historically never been too shy about investing the capital today to garner more revenue tomorrow. Although the margins in the parks/resort business aren't all that great, the cash-on-cash return is better than you might think.

SEE: Walt Disney: How Entertainment Became An Empire

I believe Disney could also have opportunities to readjust its media exposure. As Citi's analyst Jason Bazinet highlighted a couple of months ago, the value of Disney's stake in A&E Television Networks (it owns 50%, with Hearst owning the other half) is likely worth about as much as Hearst's 20% stake in ESPN.

With Disney focusing more and more around core brands (essentially winnowing out the underperformers and really supporting the winners), it would make some sense to swap these assets. Said differently, I'd rather own 100% of SportsCenter and the broadcast rights to the NFL, NBA, NCAA, and MLB than 50% of “Duck Dynasty” and “Ancient Aliens”. Of course, a deal would almost certainly be predicated on Hearst's willingness to do the swap, and given Hearst's extensive diversification, they may not want to let go of their stake in ESPN without some extra inducement.

The Bottom Line
I have to admit that I was a little disappointed to see Disney license the right to develop Star Wars games to Electronic Arts (NYSE:EA), but it's hardly inconsistent with Disney's philosophy of really focusing on what they do well. What's more, it's a small quibble with what is otherwise a very solid business run for the long-term.

Even with that long-term focus, I'm not a buyer today. I've missed the big run in Disney, largely as I didn't think investors were going to bid up consumer stocks (particularly those with strong brands) so aggressively. Accordingly, whether by discounted cash flow or EV/EBITDA, Disney certainly doesn't look like an undervalued opportunity today. Were Disney to stumble (say, if the Lone Ranger movie flops) I'd happily reconsider, but above $60 it's hard to see this stock meeting my long-term return requirements for new buys.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Active Trading

    Evaluate Stock Price With Reverse-Engineering DCF

    This is a more accurate method to use when trying to find a target price for a stock.
  2. Investing Basics

    DCF Valuation: The Stock Market Sanity Check

    Calculate whether the market is paying too much for a particular stock.
  3. Entrepreneurship

    Walt Disney: How Entertainment Became An Empire

    One of the most powerful companies in the entertainment sector has some lessons to share for new budding entrepreneurs.
  4. Personal Finance

    Top Grossing Cartoon Movies

    Recently, animated movies have been capturing the attention of both children and adults, and in the process, have attracted enormous revenue.
  5. Active Trading

    Make Money On The Movies

    If you think you know which films will tank and which will soar, this new way to trade could be for you.
  6. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  7. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  10. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!