Amidst all the tumult over oil prices, new highs in copper, soaring grain and a global industrial recovery, a giant has quietly gone about its business of hoovering out more dollars from people's wallets. As consumers are reopening their wallets, and consumer goods companies rush to convince them to spend on their products, Disney (NYSE:DIS) is delivering some impressive results.
A Good Open to the Year
For its fiscal first quarter, Disney reported that revenue had risen 10% to nearly $11 billion. Within that figure, the TV business saw 11% growth, theme parks and resorts grew 8%, and creative content (movies, etc.) grew 6% as 24% growth in license revenue offset flattish movie results. Drilling even deeper, ESPN ads were up a startling 34% as this leading cable network continues to serve an apparently bottomless appetite for sports. While traffic at the theme parks and resorts seemed a bit soft, the spending per attendant was quite strong and bookings for the second quarter seemed alright. (For related reading, check out 4 Non-Cyclical Growth Stocks Increasing Dividends.)
Going down the line, it's hard to complain about the company's profitability. Overall earnings before interest and taxes jumped 39%, with the TV business doing even better (up 47%). All in all, Disney improved its operating margin by almost four full points, a pretty remarkable result.
The Road Ahead
Looking out into 2011, it would seem that Disney has the wind at its back. The company's ABC network is not really lighting it up in terms of ratings, but Disney seems to have found a workable solution for the time being in cutting production costs. Moreover, ratings success is fickle and unpredictable; it was not that long ago that CBS (NYSE:CBS) was a basket case. In the meantime, ESPN and the Disney Channel are crown jewels that draw millions of viewers every night - though some may be surprised to know that NBC Universal's (co-owned by Comcast (Nasdaq:CMCSA) and General Electric (NYSE:GE)) USA Network is actually the number one cable network.
Elsewhere, Disney continues to offer a resort experience that Royal Caribbean (NYSE:RCL), Carnival (NYSE:CCL) and Six Flags (NYSE:SIX) cannot. Moreover, that octopus-like pipeline of TV, toy and ticket revenue from the studio operations is tough to beat and is a great source of high-margin cash flow, though the hit-and-miss nature of movies and the ever-rising production costs make that a source of volatility as well.
At this point, it is hard to see why Disney would not see a good growth outlook for the next couple of years. The economy seems to be slowly recovering, and that should mean upward pressure on ad rates, as well as better attendance at theme parks and movie theaters, and more spending on the toys and licensed merchandise.
The Bottom Line
When I last reviewed Disney, I frankly underestimated the company's operating leverage and the extent to which the company would drive better revenue and better profits. That's the problem with modeling - miss a percent or two here or there in the model and "fair value" can swing by 20%. That's also the virtue in taking a more comprehensive view of stocks and hanging on to good companies even through those periods when they do not seem especially cheap.
Although Disney still does not produce a high enough return on invested capital to appeal to me as a long-term holding, there is no denying that business is good these days at the House of the Mouse. (For more, see 3 Secrets Of Successful Companies.)
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