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The Long Case For Disney


Cross-segment product development allows investment in one product to increase revenue throughout various sectors.

Disney’s movie franchise building and movie studio box office returns are unmatched in the industry.

Developments in film and expansion of its theme park sector can increase potential for all segments to expand.

By John D Li, Dennis Wang, Michael Huang, and Greg Lim

Recently Disney (NYSE:DIS) has been plagued with fears that movement to online entertainment has cut into ESPN profits and subscribers. Although ESPN has been losing subscribers, its profits continue to grow due to higher advertising costs. As the nation's leading sports network, ESPN holds an advantageous position as one of the few remaining sources of entertainment that has not fully transitioned online yet, and its small but steady growth year-to-year shows that any cord-cutting fears can be put to rest; there is no real substitute for ESPN.

To understand why Disney is a long buy, we have to stop dwelling over ESPN and focus on the massive growth potential of Disney's other segments, including theme parks and studio entertainment, their next two most profitable segments, which have grown at a far greater rate than their media networks segment (see chart below). Other than media networks, Disney's four other sources of revenue are its theme parks and resorts, studio entertainment, consumer products, and Disney Interactive segments. What makes Disney different is that any development in any one of these four sources of revenue will lead to opportunities in the other three segments. By developing and marketing products across their segments, each segment can boost growth in the other ones, making it a strong bet to go long Disney.

(click to enlarge)

Source: The Walt Disney Company

Studio entertainment:

Disney's movie studio segment has been one of the fastest growing studios in the movie industry lately, with box office grosses consistently up year-to-year, year-to-date profits up 27% over last year, and 2015 Q4 profits more than doubling 2014 Q4 profits. Disney has more blockbuster franchises than any other competing studio, with the Marvel Cinematic Universe, the live action fairy tale remakes, Pixar Studios, Disney Animation Studios, and now the rebooted Star Wars franchise. Each of these franchises is launching some of their potentially most marketable, most profitable, and most easily merchandised entries within the next couple of years, increasing growth potential for the company significantly. The Good Dinosaur and Star Wars: Episode VII are tracking to dominate the holiday box office season, with the combined revenues from both films projected to total at least $2 billion worldwide (online ticket presales for Star Wars VII have broken the previous records by over 6 times). Next year, The Jungle Book live action remake should top this year's Cinderella ($542 million) given the larger male demographic. Furthermore, the Alice in Wonderland sequel...