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The business outlook at The Walt Disney Company (DIS Free Disney Stock Report) is promising, despite some near-term concerns. The diversified entertainment company has good fundamentals, and has benefited from recent studio releases, most notably with the success of the latest Star Wars movie, and more recently with Finding Dory. The company is also expected to profit from its Parks and Resorts segment, which includes recently-opened Shanghai Disney, as well as the ongoing success of Pixar, Marvel, and other assets. While there are some concerns, particularly surrounding the ESPN segment, due to a declining number of subscribers, as well as increased competition on multiple fronts, the overall outlook looks favorable.

The company has posted several quarters of year-over-year earnings gains. The question is whether investors should build positions in Disney stock at the current juncture. Will the earnings advances continue? Also, are the shares are a good long-term investment, given the fierce competition and changing media landscape? We will address these issues by performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.

The Business

The Walt Disney Company, founded in 1923 in Burbank, California, is a diversified worldwide entertainment company with operations in five business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive. The Media Networks group includes cable and broadcast television networks, production operations, distribution, domestic television stations, including ESPN, The Disney Channel, and ABC Family (now knows as Freeform as of January), and radio networks and stations. The Parks and Resorts segment is comprised of Walt Disney World Resort in Florida, Disneyland Resort in California, Aulani in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney. It also has an 81% ownership of Disneyland Paris, a 47% stake in Hong Kong Disneyland, and a 43% share of Shanghai Disney resort. The Studio Entertainment division produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings, and live stage plays. It distributes its films largely through the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. The Consumer Products segment works with licensees, publishers, and retailers to develop, promote, and sell a wide variety of products based on the company’s intellectual property, film, and television properties. The Interactive group creates branded entertainment and lifestyle content across interactive media platforms.  As of October 3, 2015, the company employed roughly 185,000 people.

Strengths

Diversified Business: Disney has grown from a small producer of animation series in the 1920s to one of the largest media and entertainment conglomerate in the world. The company has been benefiting from its investments in Parks and Resorts group, which reported a 7% rise in revenues in fiscal 2015, driven by significant price increases at many of its properties. It also saw big gains from its movie business, in particular via the Star Wars franchise, which broke a slew of box-office records a few months back. The Studio Entertainment group should continue to post good results, given the fact that Disney plans to release a new Star Wars movie every year for the next five years. Disney’s Consumer Products segment has also been benefiting from success in other areas, as it continues to receive royalties for Star Wars and Marvel related toys and other products.

Financial Strength: Disney has a very strong balance sheet, and generates robust cash flows. As of April 2, 2016, the company had roughly $5 billion of cash on hand, and total debt was around 30% of capital. Disney has a Financial Strength rating of A++ in the most recent Value Line Investment Survey. All of these factors have allowed it to be able to consistently make acquisitions and pay a decent dividend. It has also provided the company with the ability to expand its presence throughout the world over the years, particularly in Asia.

Strong Brand Equity: The Disney brand is known throughout the world, and is regularly listed as one of the best global brands of all time. The company is known to have a wholesome image, as it has built this image for decades through its cartoons and, more recently, through its theatrical releases. Many look up to Disney for its good values and ethics, whether through its Disneyland theme parks or many of its other family-friendly business ventures.

Weaknesses

Loss of Subscribers at ESPN: While many of Disney’s businesses have been performing well of late, one laggard has been its sports juggernaut ESPN. The multimedia entertainment company, which operates eight 24-hour domestic television networks, has lost around eight million subscribers since 2010. The division has been hurt by some unfavorable trends, including many consumers who are attempting to cut their cable bills, thus pushing down subscription rates. Many of these viewers are turning to the internet for cheap or free live sports streaming, making it difficult for ESPN to compete. Higher programming costs will also likely continue to hurt this business.

Business Volatility: As an entertainment, travel, and consumer products company, Disney’s success depends on consumer tastes and preferences, which are highly unpredictable. It is very difficult for a company in this space to consistently create films, cable programming, theme park attractions, and consumer products that will reliably meet the changing preferences of the broad consumer market. In addition, more and more of Disney’s business is dependent on overseas markets, which is even more difficult to predict from a consumer preference perspective. After significant investments, certain films, cable programs, and resort attractions simply “bomb”, and the result is a significant loss on the income statement.

Opportunities

International Expansion: Disney has been expanding its geographic reach over the past few years, and we look for this trend to continue. The company’s Parks and Resorts segment already has properties in Paris, Hong Kong, Shanghai, and Tokyo. The company just opened the gates to its first theme park in China, Shanghai Disney. The $5.5 billion investment, the largest foreign investment ever from Disney, is a bet on China’s growing middle class and booming domestic tourism. The company already has plans to expand the property, given the extraordinary success in just the few weeks it’s been open. We think the company could open other theme parks in the country, and in other regions in Asia, in the coming years.

Investments in New Media Partnerships: Disney has made some investments in new media platforms in recent months that it hopes will allow it to regain some of the cable subscribers it has lost over the past few years. It invested roughly $400 million in Vice Media, an American-Canadian digital media and broadcasting company. Thanks to Disney’s investment, Vice has been able to start its own news channel called Viceland. Disney is also talking with DISH Network’s (DISH) Sling TV about the possibility of including Disney’s programming in the multi-stream Sling TV. We anticipate other partnerships in the coming months and years as the media industry continues to evolve.
Threats

Competition on All Fronts: Disney is a huge company, with many segments in different industries. As a result, the company faces competition on several fronts, including from providers of products and services from other entertainment, lodging, tourism, and recreational activities. On the cable side of the business, Disney faces competition from not only other cable and satellite services, including Time Warner Inc. (TWX) and Comcast Corporation (CMCSA), but also from web streaming companies, including Netflix (NFLX) and Amazon.com's (AMZN) Prime. Web-based media will continue to expand in the coming years, and Disney needs to continue to shift its overall strategy to include this growing segment. The company’s theme parks, which are very expensive by industry standards, have to compete with other, smaller, cheaper amusement parks, including those from Six Flags Entertainment (SIX), as well as from other resorts and recreation companies. Disney’s studio operation face competition from other heavy hitters in the movie business, including Twenty-First Century Fox (FOXA) and Time Warner's Warner Brothers. As a result, competition is, and will likely always will be, an ongoing threat.

Conclusion

All told, we think Disney’s strengths and opportunities outweigh its weaknesses and threats. The company’s most recent results, for the fiscal second quarter ended April 2nd, were mixed, as there was upside from the Parks & Resorts and Studio Entertainment segments, partially offset by softer Media Networks and Consumer Products results. However, we still look for solid revenue and earnings gains this year, with most divisions supporting the advance. Competition is expected to remain fierce, however. Risk-averse investors will like the fact that Disney stock has a Safety rank of 1 (Highest) and a top Financial Strength rating of A++. While the equity pays a dividend, it is below the Value Line median.

Over the longer term, patient investors could benefit from future growth potential from the Shanghai Disney resort and the Star Wars franchise, among other potential movie blockbusters from Pixar, Marvel, or Lucasfilm. Planned Star Wars-themed lands at Disneyland and Disney World could also boost results longer term, although short-term costs for these projects could temper earnings growth in the near term. Subscribers interested in learning more about Disney should check out our full-page report in The Value Line Investment Survey. 

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