Shares of The Walt Disney Company (DIS - Free Disney Stock Report) have risen roughly 27% year to date (they hit an all-time high in May of nearly $68), easily outpacing the double-digit moves registered by the broader Dow Jones Industrial Average and Standard & Poor’s 500 Index. The blue-chip stock appears fully valued at present, however, trading slightly above 19 times Wall Street’s consensus earnings estimate of $3.37 for fiscal 2013 (ends September 28th). Should investors look elsewhere for healthy returns? Or is this high-quality Dow component still worthy of consideration? In this article, we’ll take a brief look at Disney’s business and perform an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.

The Business

Founded in 1923 and headquartered in Burbank, California, Disney is a diversified entertainment conglomerate, with approximately 166,000 employees and annual revenues fast-approaching the $45 billion mark. The company, headed by CEO Robert Iger (he succeeded Michael Eisner in 2005), operates in five business segments, including Media Networks (about 46% of the top-line mix), Parks and Resorts (30%), Studio Entertainment (14%), Consumer Products (8%), and Interactive (2%). And among its most valuable, cash-generating properties are the ABC broadcast network, the ESPN and Disney Channel cable networks, the Walt Disney World Resort, the Marvel, Pixar, Walt Disney, and Lucasfilm movie studios, and The Disney Store retail concept.


Cable Prowess: Disney’s cable networks, especially the ESPN sports channels, are cash cows, earning high ratings in key demographic segments and generating the lion’s share of the company’s profits. And recent distribution deals, like last year’s multiyear contract with Comcast (CMCSA), suggest that the profits will keep rolling in – even as competition intensifies and sports programming costs continue to rise sharply.

Solid Theme Parks Business: This business has faced headwinds from higher investment activity and an uneven macroeconomic environment. But pricing remains healthy, and recent attendance and guest spending trends have been pretty encouraging. What’s more, the aggressive investments of late, highlighted by a new “Avatar Land” themed area to be added to the Florida park, a major expansion in Hong Kong, and a $4.4 billion Shanghai Disney Resort that is scheduled to open in 2015, should begin to garner substantial benefits during the latter stages of the decade. And renewed strength across the U.S. economy, where the rebound in the housing sector has been surprisingly sharp, should help matters in the near term, and lead to a further uptick in domestic attendance.

Strategic Acquisitions: Disney, particularly during the Bob Iger era, has an excellent track record of inking accretive deals that enhance its growth profile. Following its purchases of Pixar (for $7.4 billion in 2006) and Marvel (for $4.2 billion in 2009), the company bought Lucasfilm, owner of the hugely successful “Star Wars” franchise, late last year for about $4.1 billion. This transaction should not only shore up Disney’s (recently shaky) studio operations, but it ought to be good news for the consumer products and retail businesses. The first Disney-produced “Star Wars” feature is set to hit theaters in the summer of 2015.

Excellent Free Cash Flow: This, along with a first-rate balance sheet (Financial Strength: A++), allows the company to pay a modest dividend and stay active on the stock-buyback front. It also supports M&A pursuits, and we would anticipate that Disney will keep adding to its entertainment arsenal via acquisitions going forward.


Uneven Box Office Receipts: Disney has had its share of movie flops lately, such as The Lone Ranger and last year’s big-budget John Carter. (The latter prompted a huge write-down, and the former Johnny Depp-led Western may eventually require one as well.) These misfires, should they persist, will likely keep future growth in check, though the film operations account for less than 15% of total revenues, and the company has sought to reduce risk by releasing fewer titles and making more sequels of proven franchises, like the Iron Man and Pirates of the Caribbean series.

Soft Broadcast Segment: This segment has been a mediocre performer in recent times, with programming costs on the rise and ratings (and advertising revenue) at ABC being rather underwhelming. Plus, broadcast television continues to lose viewers to cable channels and interactive content. And more Americans are getting involved with social media, which means that fewer hours are being spent in front of the tube. While the company insists that ABC is among its core assets, we would not be surprised to see a sale of the broadcast network before too long. This would allow Disney to solidify its cable empire at a time when competition is heating up.

Interactive Losses: The interactive business has operated in the red over the past several years, mainly because of weak video game sales and a failure of social network gaming to take off. Still, management expects the unit to turn profitable shortly, and has high hopes for a new “Infinity” platform that lets animated Disney and Pixar characters be synthesized into the gaming experience.


China: We see China as the biggest external opportunity for Disney, as it looks to enter new overseas markets and leverage its iconic entertainment properties. With this in mind, we’ll be closely watching developments at the new Shanghai Disney Resort, which has been fifteen years in the making and is expected to be a runaway hit with China’s rising middle class. We have every reason to believe that the new resort will be successful, thanks, in part, to the company’s learning experience with Hong Kong Disneyland, which opened its doors in 2005. That important project taught Disney how best to adapt its theme parks to the preferences of its new Asian customers.


Falling Cable Fees: With cable being Disney’s primary cash generator, a material drop in fees from the likes of Comcast and Time Warner Cable (TWC) would likely spell trouble for the company’s bottom line. At the very least, we expect some moderate pricing pressure to eventually emerge, in light of the maturity of the pay-TV market and the decision by many young consumers to bypass cable television in favor of cheaper alternatives.

Costly Sports Rights: The battle for sports distribution rights remains cutthroat, and is likely to push programming costs markedly higher in the years to come, something that could result in a profit squeeze. Most of ESPN’s existing distribution agreements, like the one it has with the NBA, are quite lengthy, however, so costs are unlikely to skyrocket anytime soon. Plus, fee growth remains decent enough at this juncture to offset any new cost headwinds.

Heightened Competition: Given the smashing success of ESPN, it’s not surprising that rivals are entering the sports fray. In fact, ESPN is now competing for viewers with NBCUniversal’s NBC Sports (NBCUniversal is owned by Comcast) and 21st Century Fox's (formerly News Corp.) (FOXA) Fox Sports West cable channels. And we expect this trend to persist well into the future, which may well drive up programming costs.


In sum, while the road ahead is sure to have some pitfalls, we believe that Disney’s strengths and opportunities far outweigh its weaknesses and threats at present. Moreover, considering the global power of the ESPN and Disney brands, we think that the stock’s premium valuation is warranted. There may well be upside to our 3- to 5-year estimates, too, as aggressive stock buybacks and accretive acquisitions bolster share net, and as the company makes inroads in the huge Chinese market. In view of this, and the likelihood of consistent hikes to the annual cash dividend, we think that it’s not too late to accumulate Disney shares. A DIS stake may, in fact, prove to be very entertaining for long-term investors.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.