It’s been a great 2013 for The Walt Disney Company (NYSE:DIS) shareholders, who have seen the stock rise 35% since the beginning of the year. With returns like that, you’d likely think that the house that Mickey Mouse built can do no wrong.
At the same time, the company’s investing case isn’t as sparkling clean as investors may prefer, as the media giant is likely to take a bath on one of the year’s biggest movie flops.
With all this in mind, there’s one question left to answer: is The Walt Disney Company (NYSE:DIS) still a great stock to buy?
A true media empire
It’s no exaggeration to say that The Walt Disney Company (NYSE:DIS) is truly a media juggernaut. Disney is a Dow Jones Industrial Average component and holds a $120 billion value by market capitalization.
The company operates in five segments, including Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive.
Not surprisingly, the company’s Media Networks segment is where Disney derives most of its business. This segment accounts for nearly half of The Walt Disney Company (NYSE:DIS)’s revenue all by itself.
Media Networks is where The Walt Disney Company (NYSE:DIS)’s powerhouse television entities reside, which include ESPN, A&E Television Networks, ABC, and the Disney Channels.
A crack in Mickey Mouse’s armor
The one blemish on The Walt Disney Company (NYSE:DIS)’s resume in the most recent quarter was its Studio Entertainment division, which saw revenue decline 2% and operating income fall 36% when compared to the same quarter last year.
The reason for this is the relatively tepid response to the company’s blockbuster film Iron Man 3, which did well in its own right, but failed to match the spectacular success of last year’s hit movie, The Avengers.
Of concern for shareholders now is the fact that things in the Studio Entertainment division aren’t expected to get better in the current quarter. The Lone Ranger was an unmitigated disaster, and it’s going to cost The Walt Disney Company (NYSE:DIS) big.
All told, the company expects to lose between $160 million and $190 million on the expensive summer movie bomb, which Disney will incur in the next quarter.
It’s for this reason that The Walt Disney Company (NYSE:DIS) fell in after-hours trading upon releasing quarterly results, although the drop was relatively modest.
A true powerhouse, but perhaps not the best media stock?
The Walt Disney Company (NYSE:DIS) is, without question, the industry leader in terms of size and brand recognition. That being said, Disney is not without competitors, and there may actually be better stocks to buy in the space.
Viacom, Inc. (NASDAQ:VIAB) is a $37 billion company by market value, which operates various television networks including Comedy Central, Nickelodeon, MTV, VH1, and Spike. The company also holds a Filmed Entertainment segment under the Paramount Pictures brand.
Viacom, Inc. (NASDAQ:VIAB) recently released extremely strong third-quarter results. The numbers were excellent across the board. Revenue rose 14% year over year, and adjusted diluted earnings per share soared 33% versus the same quarter last year.
The company saw strength in both its Media Networks and Filmed Entertainment segments, pointing to the success of Star Trek Into Darkness and World War Z.
At the same time, there’s reason to think Viacom, Inc. (NASDAQ:VIAB)’s blowout results may have been a one-quarter phenomenon.
Taking a broader view, Viacom, Inc. (NASDAQ:VIAB)’s total revenue and operating income are actually both down 4% through the first nine months of 2013.
Meanwhile, close competitor Discovery Communications Inc. (NASDAQ:DISCA) recently posted great results in both its fiscal second quarter and fiscal first half.
Total revenues was up 30% in the second quarter and 19% over the first six months. Ditto for the company’s adjusted operating income before depreciation and amortization, which was up 23% and 11% in the second quarter and first half of 2013, respectively.
At the same time, investors are paying a steep price for Discovery Communications Inc. (NASDAQ:DISCA)’s growth. At current prices, new investors are paying 30 times trailing earnings for Discovery. The Walt Disney Company (NYSE:DIS), meanwhile, trades at a much more reasonable 20 times trailing EPS.
Going forward, the picture remains the same. Discovery Communications Inc. (NASDAQ:DISCA) trades for 20 times forward earnings, a 25% premium to the 16 forward P/E multiple Disney holds.
And, Discovery Communications Inc. (NASDAQ:DISCA) does not pay a dividend, so shareholders aren’t receiving future downside protection that regular income can provide. Disney, meanwhile, yields more than 1% at recent prices.
In the end, The Walt Disney Company (NYSE:DIS) is simply the leader of the industry. The company’s growth numbers might not leap off the page for potential investors, but that’s to be expected from a company as large and mature as Disney.
Practically speaking, Disney is still growing at satisfactory rates and owns a slew of extremely valuable assets that is hard to match. Viacom, Inc. (NASDAQ:VIAB) and Discovery Communications Inc. (NASDAQ:DISCA) are both strong companies and highly profitable businesses, and their own investors will likely do well in the future.
However, there’s no matching The Walt Disney Company (NYSE:DIS)’s blend of juggernaut brands. For long-term investors, Disney is the best bet among the diversified entertainment stocks.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney.
The article Should You Buy This Media Conglomerate? originally appeared on Fool.com.
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