Disney's Beautiful And Beastly Fourth Quarter

By Glenn Curtis | November 10, 2008 AAA

General Electric (NYSE:GE) makes everything from kitchen appliances to aircraft engines, and Tyco (NYSE:TYC) manufactures products as varied as fire detection systems and flow control units for the oil and gas industry. Yet, some investors refuse to invest in businesses that have multiple product divisions out of fear that such companies are ripe for management difficulties.

The benefits of diversification should not be overlooked however. If one sector crumbles, the remaining sectors keep the company standing. Disney (NYSE:DIS), which has its hands in movies, television and theme parks, is a company wide on diversification and ideal for long-term play. (To dig deeper into diversification, read The Importance of Diversification.)

Under The Sea With Disney
Disney's beginnings date back to the 1920s, when its famous founder Walt Disney started in the film business. The cartoon studio would turn out legendary films like "Three Little Pigs", "Pinocchio" and "Fantasia". Along the way, Disney's most popular character - Mickey Mouse - also would come to life.

Disney's expansion began in 1955 with the opening of Disneyland in California. In 1971, Walt Disney brought his theme park to the east coast by opening Disney World in Florida. Over time, other theme facilities like Epcot Center and Sea World were built and overseas expansion resulted in theme parks being installed in Japan and France. By the early 1980s, Disney Channel was launched.

Throughout Disney's growth into the amusement park and television sectors, it continued to release an array of extremely popular movies that generated lucrative merchandise-related sales, which helped the company expand further. In 1996, it bought Capital Cities/ABC, which gave Disney ownership of the ABC television network, nine other television stations, 21 radio stations, seven daily newspapers and ownership positions in the cable networks A&E, Lifetime, History Channel and ESPN.

Most Recent Quarter Down The Rabbit Hole
This past Thursday, California-based Disney generated a lot of press with dissemination of its fourth quarter earnings release. In trying economic times such as these, great scrutiny is paid to companies that appear to have staying power, despite a general market malaise.

In the period ended September 27, Disney turned in an adjusted EPS of 43 cents per share, which is 1 cent ahead of last year, but 6 cents south of analyst expectations. Its media networks business showed a slight decline in operating income, but its studio entertainment business posted a 42% drop in operating income, while its parks and resorts sector showed a decline of 4%. On the upside, Disney's consumer products segment showed an increase in operating income of 14%.

Poisonous Apple In The Parks Sector
Disney's bottom line number is unimpressive and persistent problems in the U.S. economy could cause Disney's parks business to slip further in coming months. Disneyland and Disney World are legendary. But in this dismal economic environment, people are traveling less due to high costs for air fare to fly, gas prices to drive, food expenses to eat and lodging prices to sleep.

But other parks and entertainment facilities are giving Disney a run of its money. Six Flags (NYSE:SIX) has been big on coupons. And Kings Dominion (in Virginia) and Hershey Park and Dorney Park (in Pennsylvania) have worked hard to garner visitors from the heavily populated northeast. For many consumers, Cedar Fair (NYSE:FUN) and Great Wolf Resorts (Nasdaq:WOLF) are cost-effective alternatives to Disneyland or Disney World. (To learn more about competition, read Competitive Advantage Counts.)

Fantasia Of Diversification
While Disney's parks business could be an issue for the next few quarters, the company's prospects over the long-term are bullish. Its parks sector ultimately will rebound and the other sectors also have a chance to reverse course. Kids continue to flock to "Hannah Montana" and "High School Musical" movies and merchandise and, with Christmas and Hanukkah just around the corner, a fair amount of holiday merchandise will be sold, too. At the end of the day, Disney's media business could remain a pillar of stability that sees the company out of these tough economic times.

Bottom Line
If you're a believer in the merits of the tortoise over those of the hare, Disney's diverse businesses could direct the company past its so-so quarterly earnings and beyond the threats it faces in the parks sector.

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