Wednesday, December 19, 2012

Disney: Firing on all Cylinders - A Disney Dissection

One way is to look for trends of consistently above average operating margins. Even better, look for trends of above average operating margins that are on the rise.

When analyzing media conglomerates like Disney, however, it's not good enough to analyze operating margins for the company as a whole. Instead, investors should analyze the different business segments of Disney's empire, one by one. Comparing company operating margins to peers is a good start, but digging deeper into each segment is where investors can gain the most insight.

                                                        A Disney Dissection

In the above chart it is clear that Disney derives the majority of its operating income from its Media Networks segment. This segment is made up of international and domestic cable networks and its broadcasting business. The networks include ESPN, Disney Channels Worldwide, and ABC Family--plus 42.1% ownership in A&E, Lifetime Television, and the History Channel. The majority of sales from this segment come from ESPN.

Interestingly, Disney's Media Networks segment only represents 46% of revenue, despite a whopping 67% share of the company's total operating income. So not only is this Disney's largest source of profits, it is also the most profitable source.

But let's dig even deeper.

In the chart below it is clear that profits are increasing in each of Disney's four main business segments:

This is great; operating income is increaseing. But what about operating margins in each business segment?

As seen in the above table, Each of Disney's segments have increasing operating margins over the last three years except Disney's Interactive Media segment, which represents a paltry 2% of revenue. Furthermore, Disney's largest segment, Media Networks, has contributed incrementally more per dollar in each of the last three years than any other segment. These trends all point toward superior pricing power.

Compared to three of its peers, Dreamworks (NASDAQ: DWA), CBS (NYSE: CBS), and Time Warner (NYSE: TWX), Disney now has the highest overall operating margin.

The Bottom Line
With increasing operating profits and increasing operating margins across each of Disney's main business segments, there is clear evidence of pricing power at the Disney empire. Disney's powerful pricing power, however, can't be purchased cheaply. But with operating margins increasing so significantly, especially in Disney's largest and most profitable Media Networks segment, investors might consider paying a premium price for Disney's stock in order take ownership in a solid investment for the long haul.

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