Studio Division Could Be Next Big Growth Area For Disney

By
A A A

Submitted by Investing Daily as part of our contributors program .

The Walt Disney Company ( DIS ) reported better-than-expected earnings Tuesday night. Investors also cheered news from CEO Bob Iger that the company is aggressively moving forward with Lucasfilm, maker of the Star Wars films, which Disney bought in a deal valued at $4.1 billion in October. More on that below.

Disney Parks and TV Assets Turned in a Strong Quarter

In its fiscal 2013 first quarter, which ended December 29, 2012, Disney saw its revenue rise 5.2%, to $11.34 billion from $10.78 billion a year ago. But net income declined 5.6%, to $1.38 billion. Earnings per share fell 3.8%, to $0.77, on fewer shares outstanding. Excluding certain non-recurring items, Disney earned $0.79 a share, topping the consensus forecast of $0.76

Analyzing Disney's prospects can sometimes be a tricky proposition, because the company operates in a mind-boggling array of businesses, from cruise lines to retail stores and TV stations. The largest slice of its revenue (45.0% in the latest quarter) comes from the media networks division, which owns the ABC television network and a number of cable channels, including ESPN, ABC Family, the Disney Channel and A&E.

In the latest quarter, media revenue rose 6.7%, to $5.1 billion. Operating income rose just 2%, however. Production costs rose at ESPN, but that was offset by higher revenue at the cable stations. ABC also benefited from a rise in advertising spending, particularly on political ads.

The other big slice of revenue (29.9%) comes from its parks and resorts division, where Disney also saw gains in the latest quarter. The segment's revenue jumped 7.5%, to $3.4 billion, largely on the strength of higher guest spending and more visitors in the U.S. Operating income rose 4%.

The parks business should continue to perform well. According to a November report from the U.S. Travel Association, Americans will take 1.680 billion person trips for leisure (defined as one person away from home overnight in paid accommodations) in 2016, up from 1.575 billion in 2012. It's a safe bet that a good number of those excursions will be to a Disney theme park.

Disney Owns Some of the World's Leading Film Producers

The rest of the company's sales came from its studio entertainment business (13.6%), consumer products (8.9%) and interactive (2.6%) divisions.

Disney owns the rights to some of the most popular films ever made. It founded its main Walt Disney Studios business back in 1950. Since then, Disney has added to its movie-making assets through a series of acquisitions, including its $7.4-billion purchase of Pixar, maker of the Cars and Toy Story films, in 2006. It added Marvel in 2009 at a cost of $4.2 billion.

The Disney studio division's performance can be erratic, however, because of the high marketing and production costs associated with moviemaking. For those reasons, studios typically churn out a relatively small number of films in a typical year, and a poor performer, or even a smaller than usual number of titles, can put a big dent in profits.

In the latest quarter, for example, Disney's studio revenue dipped 5%, to $1.5 billion, and operating income fell 43%, to $234 million. On the home entertainment side, the company was up against a strong performance from its Lion King Diamond Release in the prior-year quarter. In movie theaters, meanwhile, results were held back by higher distribution costs for the Oscar-nominated Lincoln and Monsters, Inc. 3D . The Lion King 3D also posted strong results last year.

Lucasfilm Could Be the Next Pixar

The company's recent moves suggest it could be on the verge of repeating the success of Marvel and Pixar with Lucasfilm. Disney is currently working on Episode VII of the nine-part Star Wars series, with release slated for the summer of 2015. As well, on Wednesday the company said that it is planning two spinoffs of the Star Wars saga that will focus on specific characters.

Disney is bringing in industry-leading professionals to work on the new Star Wars movies. For example, it has hired Lawrence Kasdan to write one of the two spinoffs; Kasdan wrote the screenplays for The Empire Strikes Back and Return of the Jedi .

The company has also hired J.J. Abrams to direct Episode VII and Michael Arndt, who won a best screenwriting Oscar for 2006′s Little Miss Sunshine , to write the script. Abrams has a long history in TV, including as a co-creator of the hit Lost series. More recently, he has been lauded for his work on the new Star Trek franchise. His next Star Trek movie, Into Darkness , is due out May 17.

The first Star Wars movie, Episode I: A New Hope , which was released in 1977, remains the second-highest-grossing film of all time (adjusted for inflation), according to Box Office Mojo. However, creator George Lucas's prequels, the first of which was released in 1999, were not as well-received, so there will be pressure on Disney to turn the franchise around. By bringing in some of the top talent in the business, management is showing that it's up to the challenge.

Meanwhile, the company has a wide range of other assets it can bring to bear to make the Star Wars films successful, including the expertise of Pixar and Marvel and its wide array of distribution channels, including its theme parks and retail stores, which will help sell more products tied to the brand. For more high-flying stocks, see The Best Stocks to Invest in Right Now .

This article by Chad Fraser originally appeared on Investing Daily .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CBS , DIS , NWS , TWX

Trefis

Trefis

More from Trefis:

Related Videos

Russell’s One Good Reason
Russell’s One Good Reason           
Tammy’s One Good Reason
Tammy’s One Good Reason             
Lisa’s One Good Reason
Lisa’s One Good Reason              

Stocks

Referenced

Most Active by Volume

87,324,760
  • $7.31 ▲ 22.04%
79,329,227
  • $17.16 ▲ 0.76%
74,153,988
  • $8.87 ▼ 5.84%
49,177,672
  • $34.01 ▲ 4.39%
44,197,901
  • $101.40 ▲ 1.38%
43,197,735
  • $11.70 ▲ 3.36%
42,712,021
  • $74.99 ▲ 1.19%
42,423,171
  • $108 ▲ 0.95%
As of 10/31/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com