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Market Update

Disney Shares Could Animate Returns for Investors

Even with the stock higher Friday, we think Disney is trading at a cheap price, says Morningstar analyst Michael Corty.


 Walt Disney (DIS) reported strong fiscal fourth-quarter results in its cable network and branded businesses (parks, movies, consumer products). Even with the shares higher Friday morning, we think Disney is trading at a cheap price (about 12 times our 2012 earnings per share estimate) and comfortably below our $44 fair value estimate. Revenue and operating profit were 7% and 23% higher, respectively, with cable networks and the parks business driving the improved results.

Cable networks sales improved 12% thanks to strength at ESPN and the worldwide Disney Channels. We realize the cyclicality of the parks business and advertising at ESPN, but we're sticking with our 5% overall sales growth forecast for 2012. We continue to think ESPN has a dominant position in live sports (its ad sales were up 18% in fiscal 2011) and remains the key growth driver for Disney. We view the increase in sports rights fees, especially for football, as manageable and believe the cable networks can maintain their current profitability over the next five years.

The story at the parks and resorts was also encouraging, as revenue growth of 11% was driven by higher per capita spending and the new cruise ship. More important, profitability expanded to 13.5% from 11.2% in the year-ago quarter after stagnating in the prior two quarters. We think the concerns about profitability at the parks are overdone as there are some one-time expenses flowing through the income statement. Looking ahead, management said hotel bookings at the parks were pacing up a low-single-digit percentage. Management expects capital expenditures to increase by $500 million, to $4 billion, with the new cruise ship, revamping portions of domestic parks, and the beginning of investment in the China Disney property. We realize some investors continue to be disappointed by the high level of capital expenditure spending at the parks division, but we view most of this spending as necessary investment in a long-lived asset. We think long-term investors should look past the current level of spending, as we expect it to start moderating after 2012..

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Michael Corty does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.