A wonderful world for Disney stock
While most media stocks continue to languish, shares of Walt Disney are up nearly 20 percent in 2006. Is there more magic?
NEW YORK (CNNMoney.com) – The magic is back for shareholders of Walt Disney.
Disney's stock is up nearly 20 percent so far this year, making it the second-best performer in the Dow Jones Industrial Average.
What's more, Disney (Research) has vastly outpaced its big media rivals in 2006: shares of News Corp (Research). are up 7 percent while CBS (Research), Viacom (Research) and Time Warner (Research) are all in the red. (Time Warner owns CNNMoney.com.)
How has Disney done it? In a word: Pixar. Disney agreed to buy its long-time partner in January for $7.4 billion.
Apple halo effect for Disney?
The acquisition of Pixar, the computer-generated imagery (CGI) animation studio founded by Apple head Steve Jobs, was widely applauded by Wall Street since it cements Disney's position as a leader in the lucrative CGI market.
Disney has had a distribution deal with Pixar, but it was set to expire after the release of this summer's "Cars." Losing Pixar, which has had six straight blockbuster hits, would have been a huge blow to Disney, which has not been very successful with its own CGI movies.
"There was an overhang about getting the Pixar situation settled," said Robin Diedrich, an analyst with Edward Jones. "Animation is so important to the Disney operation that this is something that people were worried about for some time."
The Pixar acquisition also won over many investors because of the Jobs and Apple effect. Once the Pixar deal closes, Jobs will become one of the company's largest individual shareholders and will also serve on Disney's board of directors.
Disney chief executive officer Bob Iger has already taken steps to ally Disney more closely with Apple (Research) -- videos from Disney-owned networks, ABC, ABC Family, the Disney Channel, ESPN and SOAPNet are all available at Apple's wildly popular iTunes store.
Matthew Kelmon, president of Kelmoore Investment Co, a money management firm that owns Disney in the Kelmoore Strategy Liberty fund, said that investors are banking on Disney continuing to work closely with Apple now that Jobs will have a vested interest in the company.
"There is buzz about Steve Jobs," said Kelmon. "As opposed to giving the appearance as an old media company dinosaur, it looks like Disney is figuring out what the new mainstream is and they are partnering up with the right people."
More to the Mouse than Jobs and Pixar
But others say Disney's resurgence is about more than just Pixar and Jobs.
During the past two years, ABC has gone from being the laughing stock of the major broadcast networks to arguably the coolest network thanks to hits "Desperate Housewives," "Grey's Anatomy" and "Lost."
Disney also has seen fortunes turn around at its theme park business, which accounts for 27 percent of overall sales and operating profits. Revenues from parks rose 13 percent in its most recent quarter while operating income surged 51 percent.
Credit rating agency Moody's upgraded some of Disney's debt last week. The Moody's analysts noted that Disney "has proven its ability to successfully emerge from a downturn in several lines of businesses through improved strategies in Consumer Products, Parks, and Media Networks segments."
Joe Bonner, an analyst with Argus Research, said Disney also is poised to have a strong year in its film studio business.
In addition to "Cars," this summer Disney will be releasing "Pirates of the Caribbean: Dead Men's Chest," the sequel to its surprise 2003 hit "Pirates of the Caribbean: The Curse of the Black Pearl."
So Bonner thinks that Disney may fare better than other studios, which are all battling a box office Hollywood slump. "Disney has a good lineup coming up and studios with good movies will be ok. Those that don't are going to have a problem," he said.
Investors have fallen in love with Iger as well. It's worth nothing that only two years ago, Disney was a company under siege fighting to remain independent. Activist shareholders, including Roy Disney, the nephew of founder Walt, were calling for the head of then chief executive officer Michael Eisner.
And to top things off, Disney was perceived as being in such a weak competitive position that cable giant Comcast launched an unsolicited takeover bid for the House of Mouse. Comcast eventually walked away from the deal.
But with Eisner stepping down as CEO last September, Iger has been able to make peace with the dissident shareholders as well as with Jobs, who did not get along well with Eisner.
As such, the Moody's analysts added in their report that their firm has "comfort with the strategic plans of the company, particularly in light of Bob Iger's successful transition to CEO."
More pixie dust left to lift the stock?
Still, can Disney's stock still be worth buying now that it's already had a big run?
Diedrich said that shares, trading at about 20 times fiscal 2006 earnings estimates, are still attractive given that profits are expected to increase by 13 percent this year and for the next few years.
She adds that this is the first time in a while that nearly all of Disney's major businesses are clicking. "It just boils down to earnings growth momentum -- Disney has a good well-rounded mix," she said.
Disney is also a top holding in the Longleaf Partners fund, one of the more highly regarded value funds.
And in their fund's annual report, the management team of Longleaf Partners wrote that many media companies like Disney have been unfairly beaten down because of fears of the massive transformation taking place in the media industry, i.e. increased competition from new technologies.
"Wall Street appears uncomfortable with the uncertainty that a changing competitive landscape creates. The next five years will bring change, but today's increasing cash flow at the best franchises such as Disney...is driving up values," the Longleaf team said. "These investments have a much larger margin of safety between price and value than a year ago, and they are among the most discounted names in the fund."
Bonner added that Disney deserved to trade at a multiple, based on 2006 earnings estimates, in the low-to-mid 20s. At that level, Disney's stock would trade at about $33, 15 percent higher than its current price.
So as the rest of the sector continues to struggle, it looks like Disney may wind up holding on to its newfound status as the marquee stock in media.
Apple sells its first movie. For more, click here.
Why are the Hells Angels rumbling with Disney? Click here to find out.
Analysts quoted in this story do not own shares of Disney and their firms have no investment banking relationships with the company/