Mighty Mouse: Investors flock to safety of Disney


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.

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 SP 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.

Disney is better off than its peers because its market-leading pay TV channel ESPN gets three quarters of its revenue from distributors, and just a quarter from advertisers, according to Benjamin Swinburne, an analyst with Morgan Stanley.

A 10-year deal Disney cut with cable TV distributor Comcast Corp. in January set a benchmark for healthy rate increases. Half of its renewals with distributors will be negotiated over the next two years, Swinburne says. That cycle of new deals will help Disney because smaller distributors with less leverage than Comcast and will likely pay “as much if not more” per subscriber, he says.

While a similar argument holds true for many of its peers, Disney’s channels have a more loyal following than others.

A recent survey by Lazard and Clear Voice Research asked cable subscribers to identify which channels were essential for them to continue their service. More than a third said ABC, CBS, ESPN, NBC or Fox were make-or-break channels. Disney owns two of the top five.

That kind of loyalty has given Disney big leverage at the bargaining table. Disney has taken the Lion King’s share of the $32 billion estimated to be doled out in TV fees by distributors this year with $8.4 billion for its channels alone, more than double its nearest rival.

TV watching has held steady, and could even go up if people hunker down in a weaker economy. That gives the house of Mickey Mouse considerable resilience in a downturn.

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