Walt Disney: Superhero stock in evil marketJune 4, 2012: 12:36 PM ET
Not even The Avengers could save Europe. (Bernanke as Captain America, Draghi as The Hulk, Merkel as the Black Widow, Rajoy as Iron Man, Hollande as Hawkeye and Monti as Thor, anyone?) But these superheroes have definitely helped Walt Disney (DIS) emerge from the tumultuous month of May unscathed.
Disney is just one of four Dow stocks that is up in the past month. Wal-Mart (WMT) and high-yielding telecoms AT&T (T) and Verizon (VZ) are the others. The House of Mouse is also one of only 39 stocks in the S&P 500 that have gained ground during the past 30 days. The S&P 500 has fallen 9% during that time frame, including Friday's gruesome 2.5% drop.
What's interesting about Disney's resilience is that it appears to be thriving because of fundamentals, and not because it is viewed as a classic, defensive safe haven stock like most of the other companies that have held up well as of late.
Fifteen of the 39 S&P winners are utility companies and nine are in the consumer staples (i.e. food, booze, tobacco and household goods) sector. The average dividend yield for the S&P standouts is 2.9%. Disney's yield is a respectable 1.4%. But that's still lower than what you can get with a 10-year Treasury note ... although not by much.
Disney is definitely an economically sensitive company. Its ABC broadcast network depends on advertising while its theme park unit needs consumers to feel confident enough in the economy to book pricey vacations. But investors clearly are looking past macro-woes to focus on two things: the box office and a little cable network you may have heard of called ESPN.
"The Avengers" has already grossed more than $550 million in the U.S., ranking it behind only "Avatar" and "Titanic" according to Hollywood tracker Box Office Mojo. The movie has pulled in another $800 million overseas.
Disney will reap the benefits of this in the coming quarters and could also have another hit on its hands later this summer with the next Pixar movie "Brave." It goes without saying that "The Avengers" and "Brave" could also bring in big bucks from the requisite DVD releases just before the holidays.
The success of "The Avengers" almost single-handedly validates Disney's $4 billion purchase of comic book company Marvel Entertainment in 2009. And it's made the mega-flop "John Carter" -- which was responsible for a $200 million writedown in Disney's most recent quarter and the likely catalyst for the departure of long-time Disney Studios head Rich Ross -- a distant memory.
But the movie business tends to be a series of hits and misses.
The real reason why Disney has been a dependable stock during this recent downturn is that ESPN pretty much bats a thousand. ESPN is the main factor behind the success of Disney's cable networks, which account for nearly a third of Disney's overall revenue and 56% of the company's operating profits.
Sales for the cable networks were up 10% from a year ago in the first six months of this fiscal year and operating income was up 16%. A large chunk of that is due to ESPN generating healthy fees from cable and satellite companies.
The Comcasts (CMCSA), Time Warner Cables (TWC) and DirecTVs (DTV) of the world pay Disney a pretty penny to carry the sports king. And since ESPN is essentially required viewing for any sports junkie, it also commands healthy ad rates thanks to its high ratings.
"ESPN is still doing really well. It's a core, dominant media property. They own sports," said Ted Parrish, co-manager of the Henssler Equity Fund (HEQFX) in Kennesaw, Ga. Parrish owns Disney in the fund.
But won't Disney be hit hard if the global economy does take a turn for the worse? After all, the theme park business does account for 30% of sales. And ABC's ad revenue is already down in the first six months of Disney's fiscal year. That could get worse if Europe's cold becomes a flu in the United States.
Parrish conceded that Disney, like other media companies, is cyclical. But he added that as long as ad sales "don't fall off a cliff" then the company is in a great position to continue doing well.
That's why the stock is only 4% below its all-time high and has outperformed its other media rivals. Shares of Disney are up 18% year-to-date, better than the gains of CBS (CBS), Viacom (VIAB) and News Corp. (NWSA). Shares of CNNMoney parent company Time Warner (TWX) are down year-to-date.
Still, the stock is not cheap. Shares trade at 15 times fiscal 2012 earnings estimates, a premium to the other four big media stocks. And Disney's estimated earnings per share growth of 18% this year and 13% annually over the next few years is roughly on par with the projected growth rates for the other media firms.
Tom Villalta, manager of the Jones Villalta Opportunity Fund (JVOFX) in Austin, said his firm sold some of its position Monday because it has done so well. However, he thinks that Disney is still the best media stock to own since it is not as dependent on advertising.
The resorts business is what makes Disney stand out as far as he is concerned. So far this fiscal year, despite higher gas prices and worries about the job market, theme park revenue is up 10% from a year ago and operating profits are up 26%.
"Disney has been able to raise theme park prices and bookings seem to be holding up well despite concerns about consumer spending. That bodes well for the future," Villalta said. "Even if the economy muddles along at a slow pace, Disney should be a beneficiary."
I agree. I wouldn't bet against Disney over the long haul. The company has a vast library of characters that seem to age well. My son is currently obsessed with Tow Mater and Lightning McQueen, for example. I suspect it won't be too long before he's begging to go to Disney World.
Talk about your Circle of Life. As long as people keep having kids, Disney is in great shape to profit from them.