The House of Mouse is back! This past May, Walt Disney (NYSE: DIS)
completed its $8.3 billion stock buyout of computer animation studio Pixar. I
want to introduce the company behind the world’s most famous mouse, and explain
a few reasons why I think this acquisition will give Disney’s stock a great shot
at beating the market over the next five years — and beyond.
Through its movies, cable properties, toys, and theme parks, Walt Disney touches
millions of lives around the world. Disney is a $63 billion market-cap company
with media properties that are unrivaled. Take a look at just a partial list
(deep breath): ESPN, the ABC TV and Radio Networks, a vast motion picture
library consisting of more than 850 live-action movies and 70 full-length
animated movies featuring Mickey Mouse, Donald Duck, and Goofy (among many
others), five theme parks (Disney World, Disney Land, Euro Disney, Tokyo Disney,
and Hong Kong Disney), and four movie studios. I doubt any other company sports
a bench this deep. Last year, Disney’s properties drove more than $32 billion in
revenues and $2.5 billion in earnings.
Here’s how the company is divided:
(Division, % of Sales, % of Operational Profits)
Media Networks, 41%, 59%
Parks and Resorts, 28%, 25%
Studio Entertainment, 24%, 5%
Consumer Products, 7%, 11%
In his brief tenure at Disney’s helm since October 2005, Bob Iger has shown
signs of righting a ship that had been somewhat adrift in recent years. ESPN is
a cash cow that remains the worldwide leader in sports programming. The ABC
television network has seen dramatically improved ratings over the last two
years thanks to the hit TV shows Lost and Desperate Housewives,
and should hit record profits in fiscal 2007 with the end of the money-losing
Monday Night Football contract. But the stock price has not really caught up to
Disney’s improved business reality. I believe that the Pixar acquisition, which
Disney expects to be accretive to earnings by 2008, is the catalyst that will
unlock the true value of Disney.
Pixar’s creative talent will restore the in-house animation luster that Walt
Disney used to be famous for (let’s be honest; Disney’s last great hurrah was
The Lion King, and that was 12 years ago). In fact, Pixar has created five
of the top 10 revenue- generating animated films of all time: Finding Nemo,
The Incredibles, Monsters Inc., and Toy Story (parts one and two).
Keep in mind that the Pixar-produced animated films listed above are roughly
four times as profitable as Disney-produced animated films (e.g., Chicken
Little). Leading this creative infusion will be John Lasseter, Pixar’s chief
creative officer who will continue this role at Disney Imagineering, where he
will report directly CEO Iger. Also important, Apple Computer and Pixar-founder
Steve Jobs himself will join the Disney board of directors where, as Disney’s
largest single shareholder with almost a 7% stake, he will undoubtedly bring to
bear his own invaluable business and creative insights.
I fully expect the movie Cars to boost Disney’s revenues and profits
significantly further this summer. This new animated film from Pixar may well be
one of the blockbusters of the summer, along with the live-action Pirates of the
Caribbean: Dead Man’s Chest, which is also a Disney movie! Both Cars
and Pirates II (as well as Pirates III in 2007) will provide millions to
Disney’s profit-and-loss statement, perhaps for years to come. And one mustn’t
forget that the living in a Parisian restaurant, in the summer of 2007.
Disney has the distribution and marketing power to get the most from these
movies. And don’t be surprised to see Pixar’s unforgettable characters (Buzz
Lightyear, Nemo, Mr. Incredible, just to name a few) appearing at Disney’s many
theme parks, as well as in new consumer products and ABC television programming.
The bottom line here is that the acquisition of Pixar transforms Disney from a
large-cap also-ran to an innovative up-andcomer. Disney had a hole in its
business, and the Pixar acquisition patches it nicely. Over the long-term, I
believe Disney’s rich media properties, combined with Pixar’s creative talent,
will pay off handsomely for investors over the next five years.
