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Market Update

Solid 4Q Results Cap a Great Year for Disney

Firmwide results across key business units was impressive, according to Morningstar's Michael Corty.


 Walt Disney (DIS) continues to generate impressive results across its key businesses. As recently as August 2011, the market soured on Disney for a hiccup in earnings and some perceived profitability weakness at the parks business. We maintained our long-term outlook and the shares became a bargain, trading down to the low $30 range. Today, the company is firing on all cylinders. The market is excited about its prospects and the stock is near our fair value estimate, which remains unchanged. We'll patiently wait for a better opportunity to recommend putting new money to work in Disney as we view this as a well-run wide-moat company with solid long-term growth potential of 5%-6% annually.

Overall revenue and operating income were up 3% and 13%, respectively, in the fiscal fourth quarter. The cable networks and parks business were the strongest contributors to growth. Cable network sales growth of 6% was achieved despite some headwinds from the Olympics, which took away some viewers and ad dollars, as the company indicated that advertising sales at ESPN were flat. We view this as a short-term blip as NFL and college football games across all networks are generating higher audience ratings every year and we think this trend is likely to continue. On a trailing-12-month basis, cable network operating margins of 41.9% exceed its all-time high-water mark from 2010, even with escalating costs for sports rights. We view the increase in sports rights fees as manageable and believe the cable networks can maintain margins in excess of 40% during the next five years.

The parks and resorts business generated impressive 9.5% growth with management highlighting better-than-expected growth at its international parks. Operating margins improved 100 basis points to 14.5%, even with a 90-basis-point headwind from growth initiatives flowing through as operating expenses. At the domestic parks, Disneyland outpaced Disneyworld due to the new and long-anticipated Cars attraction that drove increased traffic. Attendance at domestic parks increased 3% with 7% higher per-capita spending as Disney is now fully flexing its pricing power. Management indicated that pacing trends are positive so far in the December quarter, but there could be a minor impact from the recent hurricane in the Northeast. 

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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.