Disney Is Rationalizing Entertainment

 | Feb 08, 2012 | 6:10 AM EST  | Comments
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Disney's (DIS) made a decision, a decision that is so wise that it's a real show stopper. It's not just going to waste a lot of money pumping out movies that generate a lot of sales but no profits.

Today there's a ton of hand wringing about how Disney beat the bottom line but missed the top line and therefore should be sold.

You might want to sell Disney because it's had a nice run or because you don't want to pay a premium to the market -- 15x earnings -- for its 13% growth rate. You might say it has gone up 10% already this year and I want to find something that hasn't moved up that much yet. Time Warner (TWX), for instance, with a similar growth rate and a slightly lower P/E is only up 5% this year and has a 2.4% yield, vs. Disney's 1.4% yield.

But I sure as heck wouldn't sell it because of the revenue miss. Disney's made a conscious decision not to chase revenues. They are making fewer, better films, taking on less risk and making more money per film. They are rationalizing the entertainment business. For a company with such consistent and marvelous growth away from film, notably the theme parks and the incredible ESPN juggernaut, why roll the dice on a whole bunch of films that may or may not make it?

Other film studios may have to take that risk, but Disney, with its bankable movie franchises like "Pirates," "Toy Story" and now Marvel characters, doesn't need to constantly reinvent the wheel. You have to consider these movies as if there are gigantic products, like Tide or Crest, and sometimes it's cheaper and more lucrative to do line extensions than to keep trying to invent new categories or one-off movies that bomb.

I think the strategy makes a ton of sense. It's how you get a true premium multiple. If Disney comes down off of this so-called miss, I would be a buyer, not a seller, as Bob Iger has taken a lot of risk out of the company and given you a ton of reward.

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