Why Disney Stock Remains the Greatest of the Greats

Disney-logoIf you aren’t convinced yet that The Walt Disney Co. (NYSE: DIS) is the one entertainment stock that gives you high levels of safety, it should be readily apparent after another solid quarter.
The entertainment giant proved the point again on Tuesday when it unveiled robust fiscal second-quarter earnings that beat expectations. Let’s take a look.
Disney said year-over-year revenues were up 7% to $12.46 billion. Segment operating income rose 4% to $3.48 billion. Net income rose 10% to $2.11 billion. Translating all this to EPS, Disney stock earnings increased from $1.08 per share to $1.23 per share, a 14% increase.
Analysts’ estimates of $1.11 were crushed beneath the hands of the Hulk.
With solid numbers on both the top and bottom lines, cash flow was equally strong. Operating cash flow rose yet again, a full 15% to $2.92 billion, and free cash flow increased 10% to $2.01 billion. Unlike other multinational companies, Disney only saw about a penny and a half impact from foreign currency issues.
Investors can look at these numbers and, uh, “marvel” at the company’s ability to generate $2 billion in free cash flow in a single quarter, while other companies can only wish for that kind of efficiency. That’s what happens when you have blockbuster brands like Marvel Studios, Pixar, and LucasFilm to anchor your content.
Segment results are always enlightening and can often give a heads-up as to where the company might be struggling. Cable Networks, which includes Disney Channel and ESPN, experienced 11% revenue growth but operating income fell 9%. This was the result of higher programming and production costs at ESPN. The company took on an additional NFL wildcard playoff game this year, and launched the SEC Network.
Disney’s broadcasting segment is off the charts, with revenue up 19% and operating income up 90%. Ad revenues soared, as did affiliate fees. Because Disney owns Marvel, it picked up big licensing fees from Netflix (NASDAQ: NFLX) to show the series exclusively.
You should start to see a pattern here: diversification. Disney isn’t just movies and “Frozen” merchandise. It’s got adult TV, kids TV and sports, the former of which is in a kind of renaissance, and the latter of which has perpetual interest for many Americans.
Disney’s Parks and Resorts segment is an important economic indicator, as it shows how much people are willing to spend on travel, which has been booming. Revenues increased 6%, leading to a 24% operating income increase. Disney maintains some pricing power at its parks, although attendance fell at Disneyland, while it increased at Disney World. I’m not going to complain about 24% increases in operating income, though.
Studio Entertainment is going to fluctuate, sometimes wildly, from quarter to quarter and year to year. Disney’s films are released at different times each year and each contributes in different ways to theatrical box office and ancillary markets. So while Disney saw a 6% revenue decrease and 10% decrease in operating income, I assure you that the new “Avengers” movie and upcoming “Star Wars” movie, along with all the other films in its arsenal, will change all this.
Interactive has never been a huge money-maker for Disney. If they can’t crack the nut, nobody can. Revenues were down 12% but operating income increased 12% because of lower product and marketing costs.
Ultimately, be happy that Disney is so diversified, has so many segments that keep innovating and growing, and that it generates such great cash flow. Although debt service isn’t terribly expensive, making movies always will be, and the resorts will always need capex to keep them fresh and shiny.
Meanwhile, Disney stock has $3.74 billion of cash just in case.
Disney’s fiscal year 2015 earnings are estimated at $5.03 per share, up 16.7% from $4.32 per share last year. I expect Disney will keep beating earnings and probably end the year around $5.20 per share, meaning an EPS increase of 21%.
At the current price of $109, Disney stock trades at 21 times fiscal year 15 earnings. So on that alone, it is a fairly valued growth stock, and that’s hard to find. I love Disney, I hold Disney, and I think you should, too.

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