Disney: A Toast to 2006?
At this time last year, I wrote a piece about Disney
) and its marketing plans for its theme parks, centered around the 50th anniversary of Disneyland. Not long after that article was published, I submitted a follow-up, musing that the company's stock was finally once again above my personal cost basis. Both of these items brought high hopes that 2005 would see better times for Disney, a company which was trying valiantly to regain the growth of yesteryear.
Alas, it was not to be. As you can see from this table, Disney was priced at $27.56 on Jan. 3, 2005. At the time of this writing, a share could be picked up for around $24. One whole year -- that's 12 months, 52 weeks, 365 days of holding -- and nothing to show for it (in fact, an investor had less
to show for it).
So what happened? Why aren't the institutions buying the stock?
Well, let's get to the meat of the issue: a 69% decline in operating profits from the studio entertainment portion of the company due to a lousy slate of celluloid. Theme parks and the media group saw double-digit increases in net sales, and the media group booked a 27% jump in operating profits, but overall segment operating income rose a measly 4%. That's because studio entertainment was a drag, and operating profits from the consumer products group didn't help, either. As a result, free cash flow declined 17% to $2.4 billion.
Despite last year's poor performance, I would expect the year ahead to be a better one for Disney studios. To begin with, 2006 will see home video releases of hits Chicken Little
and The Chronicles of Narnia
's (Nasdaq: PIXR
feature will be hitting the screens in the summertime, as will the next entry of the Pirates of the Caribbean
franchise. Still, there's no guarantee that any of these flicks will be hits, and DVD sales have been slumping. And let's not forget that a bad wave of returns can bring earnings down in a hurry, as was the case with DreamWorks Animation
While consumer products is also a worrisome area for me, I think it has a promising future. In 2005, revenues dropped 15% and operating income depreciated by 3%. The sale of the Disney Store accounted for revenue drop, but the company cited rising development costs for its video game projects as an offsetting element to profits. 2006 will require a bit more patience for the company's gaming business, but it most likely should be worth it, since video games offer immense long-term growth opportunities, and Disney has plenty of content to work with.
Don't take this to mean that I'm overly bearish on Disney's stock. It's just that I've come to believe that this is one equity that will test the mettle of long-term holders like no other. What shareholders may want to focus on now is Disney's apparent interest in getting the dividend up to a more acceptable level, which is a relief, since the board didn't seem to care about total return for a long time. If Disney can keep those double-digit dividend increases coming (oh, and by the way, Bob, would you please
dole the payout to us on a quarterly basis -- none of this annual check business, thank you very much) and continue to buy back shares, then I think shareholders will feel the magic.