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Disney (DIS – Free Value Line Research Report) shares took a hit in early May after the entertainment giant reported less-than-inspiring quarterly earnings (read Value Line’s earnings Supplement for Disney). Several factors led to the relatively weak results, including a Using the VL Page_Graphpoor showing for Mars Needs Moms and a late Easter, which hurt amusement park attendance. Still, the shares have had a nice run since bottoming out at a little over $15 in early 2009. The high and low price of each year is listed atop the Graph on each Value Line equity report. 

Despite the recent price drop, the stock is trading near ten-year highs. Some of the recent enthusiasm is attributable to the company’s purchase and integration of Marvel. This well-known comic book company is allowing Disney to reach a young male audience more effectively that hasn’t, historically, been interested in princesses. This should provide the company with a plethora of growth opportunities in the future, as it develops the Marvel franchise, which includes such characters as Iron Man and Thor—the main character of a recently released, and apparently well-received, movie—Thor was the top grossing movie in the first weekend of its release.

The Marvel acquisition shows clearly that Disney is made up of far more than just the iconic Disney and Mickey Mouse brands. The list of solid brands that live in the “mouse house” includes Marvel, ABC, and ESPN. While brands such as these, and others, offer plenty of growth potential, the core Disney concept holds a lot of sway over the company’s future.

Using the VL Page_Business DiscAs the Business Description relates, the amusement parks most associated with Mickey Mouse made up about 28% of the company’s revenue in 2010. While this figure is well below the 45% contributed by the company’s media properties (such as ESPN and ABC), there is some overlap with the Disney brand on such properties as the Disney cable channel. This overlap is even more material in the Studio (movies) and Consumer Products segments.

Thus, while moving into new areas, such as comic book heros, is important for the company’s future, so, too, is maintaining the Mickey Mouse and Disney brand images. This family friendly image helps support the company’s cruise line and parks in both domestic and foreign markets, such as Tokyo, Paris, and Hong Kong. None of the company’s current roster of foreign parks, however, has the potential of the announced park in Shanghai.

Historically, profit making is only one of the factors that goes into the building of Disney parks, as they are also about furthering the Disney and MUsing the VL Page_Capital Structureickey Mouse brands. As consumers relate positively to these brands, they tend to become more regular purchasers of the company’s brand-related offerings, such as merchandise and moves. This is why moving into mainland China is so important.

The park will sit on some 963 acres in Pudong Shanghai, cost over $4 billion dollars to build, and take about five years to complete. Disney will split the cost and ownership of the park with Chinese partner Shanghai Shendi Group. Although the price tag is large and the benefits are at least five years in the future, Disney’s balance sheet is solid—debt makes up just 20% of the company’s capital structure, which can be seen in the Capital Structure box. Moreover, the company has some $3 billion in cash on its balance sheet, as can be seen in the Current Position box.

Using the VL Page_Current Position BoxThe company also produces a relatively stable and healthy flow of cash, giving it ample ability to fund construction costs over time. The Mouse House produced a little of the $3.00 a share of cash flow in 2010 (this figure can be found in the Statistical Array). Moreover, Value Line analyst Damon Churchwell projects this figure will advance to the $5.50-a-share range over theUsing the VL Page_Historical Array next three to five years—estimates and projections are found to the far right of the Statistical Array and are presented in bold. The annualized cash flow growth rate is 10.5%, which is calculated for readers in the Annual Rates box. Note that Churchwell is expecting an elevated level of capital spending between 2011 and 2016 (Capital Spending per Share is the fifth item down in the Statistical Array) but that the level is well covered by Cash Flows.

Using the VL Page_Current Position BoxSo, what is the long-term benefit of this project? Clearly, it is winning the hearts and minds of a massive audience. While Disney has operations in China, such operations do not have the penetration of the company’s U.S. businesses. Indeed, with only 24 hours of weekly programming in China, there is a lot more “reach” to go for Disney. Adding the theme park, which will take time to stabilize and become profitable, creates a deeper relationship than is available from around four hours of television. It also increases the value of all things Disney in a vast market.

From selling Mickey Mouse themed tea pots to Disney supported movies, a burgeoning middle Using the VL Page_Ratings Boxclass will have the ability to create a deeper relationship with the Disney brand and cadre of characters. Moreover, after making mistakes in Hong Kong, the company is moving to better integrate its park with the Chinese culture.

Disney is known for taking the long view of things (the recent launch of the Disney Dream cruse ship was years in the making, as well) and working diligently to get the customer experience “right.” With an A+ Financial Strength rating, the second best Value Line awards (it can be founding the Ratings box), low debt, and plenty of cash, Disney will easily be able to foot the bill for this opportunity. For investors looking to take a position in China without investing in a Chinese company, this could be an interesting angle.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.