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Disney regaining its magic touch?
The Mouse's turnaround will only accelerate once Pixar's 'Cars' hits the big screen. And with TV and theme parks also strong, the stock is still attractive.
By Robert Walberg
All is well in the house the mouse built.
Walt Disney (DIS, news, msgs) last week reported an 11.5% jump in net income and a 19% surge in diluted earnings per share for its fiscal second quarter, which ended in March. Sales of $8 billion were a bit below street expectations, but still up almost 3% versus the same period last year.
Wall Street's initial reaction was to bid the stock up 1.4% in after hours trading to $30 -- a new 52-week high.
Disney has enjoyed a revival ever since Robert Iger officially assumed the role of CEO from Michael Eisner back in September 2005. The stock is up roughly 31% over this period, compared with a gain of 11.7% in the Dow. Based on the solid performance in the second quarter, there's no reason to think that the glitter will come off Disney any time soon.
Pixar adds punch
Disney's recent acquisition of animation powerhouse Pixar sets the company up for a huge second half, as audiences eagerly await the newest Pixar creation, "Cars," later this summer. If "Cars" enjoys anywhere near the success of other Pixar films -- such as "The Incredibles," or "Finding Nemo" -- Disney will have no trouble turning around its slumping studio entertainment unit.
Aside from the upcoming release of "Cars," Disney expects big box-office business from the sequel to "Pirates of the Caribbean." The company is also banking that Mark Wahlberg will score a touchdown with "Invincible," a football biopic due out in late summer.
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As for the other key units, media and theme parks, business remains very good. Theme park sales were up 7% even during a period of higher energy costs. With summer coming up and domestic travel still strong, there's every reason to think that the theme-park business will continue to see high single- to low double-digit growth in the quarters to come. The company's 50th anniversary celebration is also driving traffic.
Disney's media unit was the top performer last quarter, with revenues and net income up by 18% and 20% respectively. The company cited strong ad revenues due to continued hits at ABC, such as "Lost." The cable business benefited from a strong quarter at ESPN, which received a boost from the timing of the college football's BCS Championship and the Super Bowl.
Desperate situation for 'Housewives'?
If there is a concern for Disney, it would be that its media unit starts to experience a slowdown of sorts, especially given the surprisingly lame season of "Desperate Housewives." Increasingly, it looks like the show was a one-season wonder. But the show has several months to get its act together, so it will be at least another six months before this unit might start to falter. (And that assumes, of course, that ABC doesn't come up with another big hit next season.)
There is also some speculation that Disney might be considering the purchase of Spanish broadcasting company, Univision (UVN, news, msgs). With the Pixar deal just completed, it might be too soon for Disney to make another big acquisition, but the growth at Univision has to be enticing. And with Disney generating a couple of billion dollars in free cash flow each year, such a move can't be discounted.
Shares still undervalued
Iger has done an excellent job so far of refocusing and revitalizing Disney. Even with the stock up 31% over the past eight months, Disney still trades at only 20 times estimated earnings, a considerable discount to the industry.
Based on an industry multiple of 25 times earnings, Disney has the potential to rise to $37 or $38 over the next six to 12 months. As such, I will keep the stock in my StreetPatrol portfolio.
However, there are some changes I want to make in the portfolio. First and foremost I will close shorts in Qwest (Q, news, msgs) and Krispy Kreme (KKD, news, msgs). Both have come back strong in the first half of this year. Though both companies continue to have their troubles, and earnings remain more promise than reality, there's simply too much momentum behind the stocks to stay short.
Also, it's time to get rid of two retailers, Aeropostale (ARO, news, msgs) and The Buckle (BKE, news, msgs). Both have performed well, but with consumers feeling the pinch of higher rates and higher fuel costs, the outlook for the sector going forward is less certain.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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