Another "Good Enough" Quarter For Disney

By Stephen D. Simpson, CFA | August 09, 2012 AAA

Media giant Disney (NYSE:DIS) did not have a perfect quarter, but it was good enough to get the job done. Media results were a little noisy, but solid revenue growth in parks and resorts coupled with good profitability in the studio made for a good bottom line result. As is often the case, Disney's stock is not especially cheap, but investors have long been willing to pay up for Disney's dominance and perceived full-cycle consistency.

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Fiscal Third Quarter Results
Disney came in a little light on revenue, but none of the line item misses were all that significant. Network revenue rose 3% as slightly weak cable results were offset by stronger broadcast performance. Parks and resorts did pretty well (up 9%), due in part to higher guest spending. Studio revenue was flat, while consumer revenue showed an 8% increase from last year.

While revenue growth may not have been stellar, the profitability of that revenue was impressive. Segment operating income was up 18%, good for a better than three point improvement in operating margin. Media margin declined, due largely to mix shift between cable and broadcast. In parks, consumer and studio, though, the profit growth was impressive.

SEE: Zooming In On Net Operating Income

Media Should Get Interesting This Quarter
The fourth fiscal quarter ought to be an interesting one for Disney's media properties. With the Olympics on Comcast's (Nasdaq:CMCSA) various NBC and cable properties, ESPN is going to see some pressure, but this was all known well ahead of time.

On the broadcast side, I would expect the company to see a boost tied to political campaigns upping their advertising in the fall. While this is also an expected cyclical event, the magnitude of the dollar amounts being thrown around this cycle seem a lot higher than in the past, so there could be some upside here.

SEE: Olympics Economics: Boom Or Doom?

How Excited Can Investors Get About Better Studio Numbers?
The motion picture business is a peculiar one, as is the way that investors and analysts approach it. In the case of Disney, it seems that there's a general willingness to look past bad numbers, but still some excitement during the good times. This isn't exactly "heads I win, tails I win," but it works in the favor of long-term shareholders.

Still, as Disney, Viacom (Nasdaq:VIA), Comcast, News Corp (Nasdaq:NWS) and Sony (NYSE:SNE) know all too well, this is a cyclical business. "Avengers" was a major hit, and the strong domestic box office bodes well for the lucrative follow-on and tie-in sales that go with all hit movies. Therefore, Disney will soak up some additional lucre from this success, but the halo won't last long if the next big movie doesn't live up to expectations.

SEE: Walt Disney: How Entertainment Became An Empire

Valuation Still a Curious Exercise
To a certain extent, I've made my peace with the valuations that other consumer "mega-brand" companies carry - companies like Coca-Cola (NYSE:KO), for instance. What's curious about Disney, though, is that the results here are generally more volatile and the returns on invested capital are typically lower than for many of these other beloved companies. Yet, Disney still carries a pretty high valuation for the most part.

The Bottom Line
I'm not going to argue that strongly against the valuation. I understand why investors like Disney, and I can't really quibble with the company's long-term performance history (nor the likely future trajectory of dividends). That said, while I understand those long-term investors who plan to hold this stock for decades, I just don't see how the valuation is compelling today. I'd probably reconsider these shares again if bad news hit (like a disappointing blockbuster), but there are other high-quality consumer brands out there today with more compelling valuations than Disney.

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

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