Disney: The Entertainment Company That Keeps Growing and Growing

Breaking the rules and defying the odds are not two phrases usually associated with The Walt Disney Co. (NYSE: DIS), yet that is exactly what the venerable entertainment combine is doing these days. Virtually alone among American entertainment creators, Disney has reported steadily growing revenues.

Disney’s revenue grew by $4.42 billion in 2015, topping $50 billion for the first time by rising to $54.32 billion in the fourth quarter. The Magic Kingdom started the year at $49.9 billion in Fourth Quarter 2014 and just kept growing and growing, bucking the trend in the entertainment business.

Time Warner (NYSE: TWX) saw its revenues grow from $27.36 billion in December 2014 to $28.48 billion in June 2015, then fall to $28.12 billion in the fourth quarter. Buffett favorite Twenty-First Century Fox (NASDAQ: FOXA) saw nothing but decline in 2015. Rupert Murdoch’s movie studio began the year with $32.59 billion in December 2014 and finished with $26.5 billion in Fourth Quarter 2015, a revenue drop of $6.09 billion for 2015.

Viacom (NASDAQ: VIA), which owns Paramount, reported a revenue decline of $850 million. Its revenue fell from $13.93 billion in December 2014 to $13.08 billion in Fourth Quarter 2015.

Why Are Disney and CBS Making Money When Other Entertainment Companies Are Not?

The only major entertainment purveyor besides Disney that reported some revenue growth was CBS (NYSE: CBS), which is basically a TV network. CBS began the year with a TTM revenue of $13.81 billion in Fourth Quarter 2014 that rose to $13.89 billion by the end of Fourth Quarter 2015. That is a nice rise considering the losses at Fox, although still down from the $14.28 billion the company reported in December 2013.

This might indicate that CBS’s digital strategy of promoting its TV shows online is paying off. Another possibility is increased advertising revenue. CBS will have two big ad revenue boosters this year: the Super Bowl and the ongoing elections in the United States, in which candidates and their supporters are expected to spend several hundred million dollars on political advertising.

The secret to Disney’s success, on the other hand, is not very hard to figure out. It can be summarized by two names: Star Wars and Marvel, as in Marvel Comics. Much of Disney’s success in recent years comes from its purchase of those two iconic franchises.

The latest Star Wars movie alone, The Force Awakens, grossed $2.08 billion at the box office as of March 2, 2016. Marvel’s The Avengers grossed around $1.519 billion in worldwide release. The Force Awakens and The Avengers both pop up on the top five list of top grossing films of the past 20 years or so.

Can Disney Sustain the Success?

Okay, this is very good for Disney’s balance sheet. The company reported a net income of $9.08 billion, a diluted earnings per share of 5.36, a profit margin of 18.89%, a free cash flow of $956 million, $11.42 billion in cash from operations and $4.301 billion in cash and short-term investments in the fourth quarter of 2015.

That means Disney has enough float to make up for the decline of its American TV networks, such as ABC and ESPN. It also has the resources to weather the shift from broadcast and cable TV to streaming video. However, Disney has lagged in creating its own distribution channels, preferring to take advantage of those already created by Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN).

The question we have to ask is how long can Disney sustain this success? Just how many Star Wars films and superhero stories does the public want to see? Many people were already tired of the Star Wars hype before The Force Awakens premiered.

What Comes After Star Wars and Marvel at Disney?

Marvel is even more problematic. Disney does not even own the movie rights to some of the most popular Marvel superheroes. The X-Men and Wolverine belong to Fox, Spider-Man to Sony and I forget who has the Fantastic Four. Oh, and Universal has the rights to the Hulk and presumably the She-Hulk. Although Universal and Sony now let the Hulk and Spider-Man appear in the Avengers because of its success.

To make matters worse, Marvel’s producers are already scratching the bottom of the barrel as superheroes go. They’ve brought Deadpool and The Guardians of the Galaxy to the big screen. One has to wonder, are Machine Man, Beta Ray Bill, Iron Fist and Quasar movies coming next?

What happens when audiences get sick and tired of Star Wars and Marvel superheroes? There are not that many pop culture franchises with the cachet and depth of Marvel and Star Wars out there. Nor are the few that are likely to be for sale anytime soon. It is hard to imagine CBS and Paramount selling Star Trek, Time Warner giving up DC Comics (Superman, Batman and all their friends) or the BBC parting with Doctor Who.

This means Disney might not be a good long-term investment, but it should make some money in the short term. Investors will not be disappointed by it in the here and now. Disney offered shareholders a 20.16% return on equity and a dividend yield of 1.4%. It was also undervalued with an enterprise value of $177.18 billion and a market cap of $159.8 billion.

If you are looking for a safe entertainment stock with growth potential, check out Disney. It is not exactly a value investment, but it is a very good company; those who buy it will not be disappointed.