Monday, April 8

Hunting for the next Disney

Hunting for the next Disney
Disney's magic keeps customers and shareholders happy. But some upstarts could grow faster. So keep your eyes on Netflix and Pandora, and watch out for Angry Birds.

The only thing you hear coming out of the Walt Disney Co. (DIS) these days is happiness. And not just the happy laughter of children scampering through its theme parks.

Shareholders are happy, too. The shares are up nearly 13% this year after a 33% gain in 2012, a 50% increase in 2011 and a 16.3% gain in 2010. In fact, since the 2009 market bottom, Disney shares are up about 260% (not including dividends) -- the fourth-best performance among the stocks in the Dow Jones Industrial Average ($INDU).

In the 21st century, Disney has emerged as a true media powerhouse with interests in cable and network television, movies, theme parks and online media. And one important thing is missing from Disney's recent past. The battles among various chiefs have subsided with Bob Iger in control as CEO.

So when investors go looking for the next Disney -- a young company that could produce similar successes and faster growth for the next couple of decades, at least -- they won't find any that can compete with the total package just yet.

Split Disney into its components, though, and you'll find a lot of smaller names with the potential to thrive. They include, believe it or not, troubled Netflix (NFLX) -- and the still-private company that created Angry Birds.

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Here's a look at what makes Disney magical for investors, and then some of the up-and-comers.

Disney is now the largest media company in the world. Walt Disney World, Disneyland and Tokyo Disneyland are the world's top theme parks. Disneyland Paris is Europe's top theme park. A new theme park will open in Shanghai in 2015.

It produces blockbuster entertainments like "Oz the Great and Powerful," the "Pirates of the Caribbean" series and the "Iron Man" movies.

Disney's stable of original characters -- from Mickey Mouse and Donald Duck to Woody and Buzz Lightyear in "Toy Story" -- are known to children around the world. Add to those the characters Disney has brought into the fold via big deals and you have an unmatched lineup. It acquired Pixar, the pioneering computer animation company behind films like "Toy Story," in 2006. It bought the Muppets and the Marvel line of comics and movies in 2009 for $4 billion, and Lucasfilm -- the company behind the "Star Wars" films -- in 2012 for $4.05 billion.

Increasingly important to Disney's bottom line -- and its stock price -- is its cable business, especially its 80%-owned ESPN sports networks. ESPN generated an estimated $10.3 billion in revenue in fiscal 2012, which ended in September, and an estimated 57% of the company's $9.9 billion in operating profit. It's a beautiful business. Cable operators pay Disney an estimated $5.81 per customer each a month to get ESPN and ESPN2, market researcher SNL Kagan says. Next highest are TNT at $1.18 and the Disney Channel at 99 cents.

In fact, what sets Disney apart from its competitors is the diversity of big revenue generators: cable and network television; theme parks where tickets run you around $100 a day, hotels and cruise ships; films; and merchandise.

It's strong enough that if a disaster strikes, like the massive film flop "John Carter" in 2012, the company can withstand the shock.

Disney's size and reach would probably surprise even the late Walt Disney. He had big, imaginative dreams, to be sure, but he wasn't a numbers guy. Not the way the modern Disney managers are. Walt's brother Roy ran the company, but Walt's creative genius was the critical element.

The brothers came to Los Angeles in the mid-1920s. Their first big success was a short cartoon called "Steamboat Willie" with a character that evolved into Mickey Mouse. The company broke into the big time with "Snow White and the Seven Dwarfs" in 1937.

After World War II, Disney moved into live-action movies. More importantly, Walt embraced television with a weekly television series and the Mickey Mouse Club. Disney also revolutionized amusement parks with Disneyland in the 1950s and Walt Disney World in Florida in 1971, five years after Walt Disney's death.

There was a lull in the 1970s, but things turned around when shareholders Sid Bass and Roy E. Disney, Walt's nephew, brought in Michael Eisner in 1984. By the time Eisner left, shares had soared 1,822%, not including dividends. Since Bob Iger took over in 2005, the shares have jumped an additional 135%. Revenue hit $42.3 billion in fiscal 2012, up from $6.1 billion in 1991. Net income jumped from $1.09 billion in 1991 to nearly $10 billion.

If you're looking for the next Disney, you're probably looking for a company that offers the growth potential of Disney in the Steamboat Willie days. That will come with more risk than the mature giant Disney carries today.

The alternative would be a traditional media company, but there really isn't one that matches up well against Disney. That world is dominated by a few names: Comcast (CMCSA), CBS (CBS), Viacom (ViA), Time Warner (TWX) and News Corp. (NWSA). All are well-established, but none is as diverse or beloved as Disney.

Rivaling those are some large companies that have been working on technologies that are reshaping the media world, and sometimes dabbling in content as well, including Google (GOOG), (AMZN) and Yahoo (YHOO). But those, too, are well-established companies that might match Disney's stock performance at times but are too big to be up-and-comers. (Read also, "Buy the next")

Just below these in scale sit two of our "next Disney" candidates, Netflix and Pandora (P). And below that, you'll find possibly hundreds of Web-based companies producing content directly for Google's YouTube and other platforms.

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