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Mighty Mouse: Investors flock to Disney

August 9, 2012

LOS ANGELES - These are happy times in the Magic Kingdom.

The Walt Disney Co.'s stock is up 35 percent so far this year, outpacing its media company rivals.

Although many media companies are experiencing a post-recession bump thanks to a recovery in advertising, analysts believe Disney can offer steady growth and safety as the economy heads into murkier territory.

Article Photos

In this 2011 file photo, people stand near the entrance to the Walt Disney Studios in Burbank , Calif. The Walt Disney Co.'s profit for the third-quarter beat analyst estimates but revenue came up short due to unchanged revenue at its movie studio despite a surge in profit from 'The Avengers.'

That's because the company has protection against a possible ad slump: The increasing fees it charges distributors of its TV channels like ESPN and ABC.

At the same time, the company's wave of investment in parks and resorts is slowing - freeing up cash for dividends and stock buybacks. And thanks to some renovations, park revenues and profit margins are on the rise.

There's also the small matter of "The Avengers," which generated $1.5-billion in ticket sales to become the third biggest movie of all time. The Marvel superhero epic has more than offset box-office bombs like "John Carter," has helped spawn TV shows, sequels and merchandise -and inspired the development of new theme park rides.

Disney's earnings are growing, and are expected to rise from $2.54 in per-share annual profits through September 2011 to $3.48 in fiscal 2013. That growth - at 17.1 percent per year - is above the average of 16.2 percent of peers Time Warner Inc., CBS Corp., News Corp., Viacom Inc. and Discovery Communications Inc.

One big reason Disney stock is back in favor: its profits are predictable, even when the economy slows. Two-thirds of Disney's profits come from TV networks like ESPN, ABC, Disney Channel, ABC Family and Disney XD. And even if advertising growth cools further, Disney is still locking in annual fee increases from distributors like DirecTV, with whom it is expected to renegotiate a long-term deal next year. The share of TV revenue that comes from such fees is seen rising toward the half-way point industry wide.

"These content fees really don't swing up or down with the economy," says Barton Crockett, an analyst with Lazard Capital. "Because they're less volatile, they're more valuable."

Indeed, shares are trading at 14.4 times the next 12 month's expected earnings, up from the 10.4 times future earnings they were trading at last September, according to FactSet. That's a 12 percent premium to the so-called earnings multiple of companies in the S&P 500, which measures how much investors are willing to pay for each dollar of profit. In comparison, its five peer companies are trading on average at a 2 percent discount.



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