Why I Shouldn’t Have Sold Disney Stock

by Jonathan Berr | May 8, 2013 10:47 am

Why I Shouldn’t Have Sold Disney Stock

Walt Disney (NYSE:DIS[1]) didn’t need to wish upon a star this quarter, as its earnings numbers came in strong. That’s good news for the company … but not-so-great news for me. Why?

Well, I sold my shares in the House of Mickey last year.

And now I’m kicking myself.

Net income at the Burbank, Calif.-based company rose 32% from $1.14 billion a year ago to $1.51 billion in the most recent quarter, helped by across-the-board gains.

Excluding one-time items, earnings per share came to 79 cents. Revenue also surged 10% to $10.6 billion. Those numbers beat Wall Street’s expectations for an EPS of 77 cents on revenue of $10.5 billion.

It’s no surprise, then, that shares of Disney spiked initially in after-hours trading yesterday (although the stock has opened in the red this morning).

That brings the company’s gains to over 30% for 2013, exceeding the performance of also-climbing rivals like Time Warner (NYSE:TWX[2]), News Corp. (NASDAQ:NWSA[3]), Viacom (NASDAQ:VIAB[4]) and Comcast (NASDAQ:CMCSA[5]).

See, Disney is benefiting from its acquisition of Marvel[6] and stands to reap huge profits from its recent purchase of Lucasfilm[7], the producer of the Star Wars franchise. But that’s just part of the story.

Let’s break down this impressive earnings report further.

Resorts

Operating income at Disney’s Parks and Resorts business surged 73% to $383 million as investments — like the addition of a new cruise ship — are paying off.  At the same time, revenue rose 14% to $3.3 billion as attendance increased at Walt Disney World Resort, Disneyland Resort and Hong Kong Disneyland Resort.

CEO Bob Iger remains bullish on this business … and its easy to see why.

As the economy continues to recover, consumers will frequent these destinations even more. Plus, gas prices are expected to fall to $3.63 per gallon this summer from $3.69 last year — great news given how many visitors of Disney’s theme parks travel there by motor vehicle.

Movies

As you know, though, Disney is anything but a one- or two-trick pony. Next section that looks solid? Movies.

Studio Entertainment revenue surged 13% to $1.34 billion in the last quarter. The business reported a $118 million profit — an improvement from an $84 million loss the year before — helped by the strong performance of Oz The Great and Powerful.

On top of that, Disney is going to do even better in the coming months thanks to Iron Man 3, which boasted a $175.3 million opening weekend — the second best domestic debut in history. Many pundits are predicting that the film will eventually gross more than $1 billion. Another Disney feature, The Lone Ranger, should be a hit as well. The film, which stars fan favorite Johnny Depp, is due to be released in July.

Television

ESPN also continues to be a cash-generating machine, allaying investor concerns about rising sports programming costs and soft ratings. Operating profit at the company’s Cable Networks surged 15% to $1.72 billion, fueled by gains in ad revenue at the sports channel.

One of the few soft spots in the company’s results was the ABC television network. That wasn’t a surprise since Comcast had similar issues with NBC in its most recent quarter, though. Higher programming costs and lower ad revenue at the network pushed down operating income by 40% to $138 million. Revenue in ABC’s Broadcasting business, which also includes ABC’s local TV stations, fell 2% to $1.5 billion.

Still, strong performance at the Disney Channel and its Marvel properties generated $763 million in revenue while operating income surged 35% to $200 million. Disney’s Interactive business lost $54 million — an improvement — and saw revenue rise 8% to $194 million.

The Bottom Line

All in all, Disney sure comes with a lot to like. I sure wish that I had never sold the stock … and you sure should be trying to get in.

Still, when shares pull back — as they have started to this morning — investors should pounce. The rewards for Disney certainly outweigh the risks.

Jonathan Berr wishes he hadn’t sold out of Disney last year. Follow him on Twitter@jdberr.

Endnotes:
  1. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  2. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX
  3. NWSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=NWSA
  4. VIAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIAB
  5. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  6. acquisition of Marvel: http://investorplace.com/2012/05/disney-marvel-marriage-a-match-made-in-asgard/
  7. recent purchase of Lucasfilm: http://investorplace.com/2012/10/lucas-sells-star-wars-franchise-to-disney/

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