Disney’s (DIS – Free Value Line Research Report) fiscal fourth-quarter 2010 earnings were uninspiring (Read our take on Disney’s fiscal fourth quarter earnings results). The market, however, didn’t seem unhappy with the uninspiring performance. Indeed, the shares rose to ten-year highs. (The monthly high and low prices are shown at the top of the Graph on every Value Line report.) Recently released fiscal first-quarter earnings (read our take on Disney’s fiscal first quarter) proved the market’s opinion of the shares was on the mark. But what about the future?
As the Business Description relates, Disney is far more than just the iconic Disney and Mickey Mouse brands. True, the company runs amusement parks and cruise lines, and creates movies and television shows under its well-known and highly regarded name brand, but it also has a solid stable of other brands. The list includes ABC, ESPN, and now Marvel.
The latter two might seem a little out of place to anyone used to spending time with “the mouse.” However, they address a demographic that Disney’s family fare doesn’t reach well—younger males. Although ESPN has long been an important part of the Disney franchise, Marvel was only purchased in late 2009 (as noted in the Business Description). The appeal of the young male demographic was likely a material part of the logic behind this purchase, supported by the success of such Marvel fare as the two Iron Man movies. (Read our initial review of the Marvel acquisition.) However, the addition of Marvel’s more than 5,000 characters to Disney’s already solid lineup of well-known characters offers material growth opportunities for the company well beyond movies.
These two generally younger male-driven businesses, however, aren’t the only places where Disney has some muscle. The company also has considerable ownership stakes in A&E, Lifetime, and The History Channel. These three are solid performers and staples on the cable option menu. These stakes are in addition to other Disney branded channels.
The company is also working to beef up its cruise line and spruce up its parks. In fact, the company’s Disney Dream cruise ship recently launched and new projects in the California Adventure theme park should lure guests. The amusement industry, in particular, is driven by investment in new rides to spur repeat business. Although many of Disney’s theme parks transcend the “thrill ride” makeup of many regional parks, that does not mean the company can ignore the need to wow guests with new and better fare.
Disney is clearly investing in its business and doing so at an increasing rate. The Capital Spending Per Share column in the Statistical Array shows the company’s commitment. From a recent low of $0.63 per share in 2006, the company increased its capital spending each year through 2010. Analyst Damon Churchwell believes that 2011 will see an even larger increase than usual, with a jump to $1.70 per share. Over the longer term, however, he expects capital spending to fall back closer to 2010 levels. This investment should yield solid earnings growth out to mid-decade, according to Churchwell. His three- to five-year projections can be seen to the right of the row headings in the Statistical Array.
One of the interesting aspects of Disney’s business model are the synergies the company generates between its units. For example, the entertainment giant’s movie and television units create characters that can be used in the amusement parks and in licensing deals (toys and clothing, for example). These same characters create an additional draw for customers of the cruise lines. The cross-pollination, in turn, increases the demand for virtually all of the company’s products, from videos to the aforementioned toys and clothing. This dynamic adds leverage to its capital spending.
It’s important to note that the spending that is taking place has not unduly burdened the company’s capital structure. In fact, at the end of fiscal 2010, debt made up just over 20% of Disney’s capital. This can be seen in the Capital Structure box to the left of the Value Line report. For a longer-term picture, a review of the Long-Term Debt row in the Statistical Array shows that debt levels have actually fallen, in absolute terms and as a percentage of the capital structure, since 2008 despite the uptick in capital spending. Management is obviously being thrifty with investors’ money.
This frugality makes sense in light of the 2007-2009 recession (denoted by a gray bar on the Graph) which pushed earnings lower in 2009 when a couple of relatively weak quarters in the first half dragged down full-year results. Quarter-over-quarter and sequential-quarter earnings comparisons can be made by examining the Quarterly Earnings box at the bottom left of the report.
Spending more to support long-term growth during the recent weak stretch, however, makes good business sense. With unemployment hovering around 9%, labor costs, a major component of construction projects, would likely be depressed. Moreover, as customers pulled back from visiting Disney properties and for spending on Disney products in other ways, sprucing up for a return to more normal spending levels will provide the company with a fresh face when customers do return. It’s even better that Marvel’s characters will be a part of the company’s roster when spending picks up steam, as they will potentially provide Disney with a new demographic to target—note the synergies with the male-oriented ESPN network.
So, as the United States, and hopefully the world, begins to recover economically, it appears that a muscled up mouse is ready to roar. Although the markets have clearly noted this fact, there is likely more upside for Disney shares.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.