Entertainment stocks can be dicey plays. The general problem with entertainment is it generally is impossible to determine if any given entertainment property will be a hit or not. Sure, bean-counters deep inside studios can make projections. Some of them might even be right. However, excepting a few franchise properties, entertainment is a crapshoot.
So, what’s an investor to do? Many entertainment stocks are pure plays, and if you bet wrong, you get hammered. The answer is to buy the stock of an entertainment company that is broadly diversified, that has its hands in many different aspects of entertainment. That way, you can enjoy in the bonanza while having the losers’ effect diluted.
There are a few companies to look at along these lines, but my favorite always has been Walt Disney Co. (NYSE:DIS). Everyone knows about the Disney brand of movies, but recent years have seen the acquisition of two powerhouse brands that mint money: Pixar and Marvel Entertainment.
Pixar is indeed one of those exceptions to the rule that you cannot predict success. Their movies always are successful because they understand good storytelling. Likewise with Marvel — besides understanding how to tell a great story, Marvel has a definitive and large fan base that will see any movie with Marvel’s name on it. As this list shows, animated films in particular make a fortune. Marvel films do, too.
But Disney’s empire extends so much farther. It owns all the ABC networks, the ESPN family and 46 radio stations. It owns popular Internet virtual world ClubPenguin.com. Of course, it has its famous theme parks, resorts, cruise line, conference centers, campgrounds, golf courses, ESPN restaurants and merchandising of all of their characters. The company produces live stage shows, direct-to-video content and television shows of their own.
So ubiquitous is the Disney brand name, and so entrenched is it in popular culture, that you cannot walk into an American household that has children and not see a bevy of Disney products.
This is why I was not fazed when Disney’s 2009 net income dropped 25% year-over-year from 2008, from $4.4 billion to $3.3 billion. Why? Despite that drop, the company’s free cash flow only dropped from $3.89 billion to $3.57 billion. In 2010, net income jumped back up 20% and free cash flow rocketed to $4.47 billion. There’s just so much cash in Disney that I never will worry about it going bankrupt, or meeting debt obligations, or depleting its $3 billion in cash reserves. Already this fiscal year, the company is on track to incrase net income by 14%, and analysts see that trend continuing for the next five years.
Disney’s net margins are 11.33%, more than 2% above competitors like Time Warner (NYSE:TWX),
News Corp. (NYSE:NWS) and Viacom (NYSE:VIA), and yet Disney trades at a price/earnings-to-growth ratio of 0.86, just slightly above its peers’ 0.75. Its return on equity is 12.36%, exceeding the ROE of its competitors, as well. It also pays a tiny 1.2% dividend. Not a big deal, but enough to sweeten the pot.
Overall, Walt Disney deserves a place in any core portfolio.
Lawrence Meyers owns shares of Walt Disney.
