Friday, 22 June 2007

Judging the Book by it's Cover: Reflections on Disney (DIS) Part I

Readers familiar with legendary fund manager Peter Lynch may recall one of the more interesting components of his investment process: checking out companies with hot new products, retailers with long lines at the checkout counter, or those that got the attention of his wife and/or kids. Lynch made it sound easy, and it certainly was for him. But he possessed a gift for investing, a gut that was frequently right, and a brain that never stopped working (the last attribute I can attest to having had the opportunity to interview Lynch with a couple of colleagues in the late 90’s. Lynch was on overdrive the entire time, and he could not get the words, or better described as streams of consciousness, out fast enough.)

I thought of Peter Lynch often during our recent vacation at Disney World. I thought of the many vacationers who were simultaneously having Peter Lynch-like thoughts as they forked out 3 bucks per bottle of water, 8 bucks for yet another Disney pin for junior, hundreds per person for a park pass, hundreds more for dinner within one of the four major Disney theme parks. Not to mention the wheelbarrows full of cash required to stay at one of Disney's 17 resort hotels.

I could see the wheels turning, the thoughts of those who wanted to own a piece of the money making machine they were observing, and willingly contributing to. I wondered how many would put in a buy order for DIS upon returning to their hotel?

While all the Peter Lynch wanna be's may have been onto something, their analysis based solely on their Disney vacation experience would have obviously been incomplete. The potential decision to buy just on what they observed at Disney Theme parks would have been premature- not necessarily unwise- just not based on all of the facts, a frequent mistake that many of investors (myself include) make. This reminded me of all the movie-goers who walked out of Disney's latest blockbuster Pirates of The Caribbean: At World's End as the credits were rolling. They missed perhaps the most pivotal scene of the movie, perhaps of all three of the Pirates movies, shown at the very end of the credits. (We were tipped off by a review we read prior to seeing the film, and were the only ones in the theater once the credits rolled.)

In Disney's case, many would be surprised to know that theme parks actually comprise less than 30% of revenue and 24% of operating income. In terms of operating margin, parks rank 3rd out of Disney's segments. While the Parks take in a great deal of cash (they certainly took enough of mine last week) the costs to run and maintain these are also very high, and the margins are not as strong as one might think.

2006 Revenues:

Media Networks $ 14,638 (43%)
Parks and Resorts 9,925 (29%)
Studio Entertainment 7,529 (22%)
Consumer Products 2,193 ( 6%)
Total 34,285

Segment operating income (operating margin%):

Media Networks $ 3,610 (24.7%)
Parks and Resorts 1,534 (15.5%)
Studio Entertainment 729 ( 9.7%)
Consumer Products 618 (28.2%)
Total 6,491 (18.9%)

While Disney's theme parks are perhaps the most visible part of the company, they are window dressing to a complex, and interesting empire. As a side note, the theme parks are part of the 43 square miles of land that Disney owns in Florida- a fact that certainly got our attention.

In our next post we'll look at Disney's current valuation in historical context.

*The author does not have a position in Disney. This is neither a recommendation to buy or sell this securities. All information provided believed to be reliable and presented for information purposes only

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