a little history
I became reacquainted with DIS in late 2009 when the company bid for Marvel Entertainment, which I had been a shareholder of for a couple of years. Several things struck me about DIS that made the investment case more compelling than I expected:
1. A new chairman, Bob Iger, was steadily reenergizing a company that had suffered for years under complacent and bureaucratic management, as happens with many mature firms.
2. Although the price being paid, $4 billion, seemed pretty full to me, I knew Marvel would benefit from DIS’s stronger distribution. And I also saw that Mr. Iger wanted to build the attractiveness of the Disney brand to boys, so Marvel had an “extra” value to DIS.
3. The theme parks were suffering from the Great Recession. I thought results would gradually improve as the economy recovered, first through an increase in foreign tourists, then through a return of US vacationers.
4. Wall Street didn’t like the Marvel deal, which made DIS even cheaper. So I bought some more.
I ended up selling most of my DIS stock about a year ago, soon after it popped above $40 a share. Two reasons: the stock was up a lot, and I worried that possible strikes by the NFL and/or NBA players would dent the profits of ESPN, which is DIS’s dominant business.
I’ve still kept my eye on DIS, which has been a market outperformer even after my sale. The media reports of strong theme park business in 2Q12 (ended March 31st) when the company reported results last week caught my eye. So I thought I’d take a closer look.
Here’s what I found.
DIS’s 2Q12 results
Excluding unusual items, earning per share were up 18% year on year, at $.58 vs. $.49 in 2Q11.
parks and resorts
Disney cruise line bookings were up 30% yoy.
Domestic theme park attendance was up 7% yoy, with spending per person up 5% in addition.
Occupancy in park hotels was up 2% yoy at 82%. Room rates were up by about 5% as well.
Disneyland set a new 2Q attendance record.
The strength in the domestic theme park business comes from two sources:
–foreign tourists, especially from Latin America and Asia, and
–reviving interest from in-state residents in California and Florida.
Out of state domestic visitation to the parks was about flat, yoy.
Operating income from the worldwide Parks and Resorts business was up 53% yoy at $222 million. The comparison is skewed by the closing of Tokyo Disneyland last year after the mid-March nuclear reactor accident in Japan, combined with a $15 million business interruption insurance payment made in the current quarter. Ex these factors, the theme park business was probably up a bit over 20%.
To me, the most encouraging news is that residents of two of the areas hardest hit by the domestic housing crisis–southern California and Florida–are starting to come back to the Disney parks.
Currently, this business is a tale of two movies. John Carter, which may have made a $100 million loss, is certainly the main reason Studio Entertainment operating results dipped into the red by $84 million in 2Q12. The other is The Avengers, which reportedly cost $220 million to make but which has had box office of over $1 billion in the first three weeks. So 3Q12′s results in this segment will doubtless be eye-popping.
Avengers-related merchandise sales are going much better than DIS had planned for. A change of actors appears to have even breathed back life into the Hulk.
This segment is two-thirds of DIS’s operating income and is driven mostly by ESPN. Changes in affiliate contracts and the differences in timing/number of sporting events make year-on-year comparisons particularly hard for an outsider to interpret. The reported you gain in operating income is 13%. DIS says an apples-to-apples comparison would be more like half of that.
I find the implications for the US economy in DIS’s results to be encouraging–and consistent with what other companies who appeal to a broad range of Americans are saying.
DIS shares aren’t expensive. They’re trading at 15x the Wall Street earnings consensus of $3.00 a share for fiscal 2012. Trend growth is probably around 15% a year. My guess is that they’ll be mild outperformers over the year ahead, with their best relative showing coming in uncertain days like these.