Disney's a Screamin' Buy - TheStreet

Disney's a Screamin' Buy

The company pounds its peers, and is cheap here.
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Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on

TheStreet.com.

Earlier this week, I stood in the rain in Miami for six straight hours to watch a football game, a rock concert, a multimedia show on football history and a celebrity interview. Although at times I questioned my sanity, those moments were fleeting because, like most of the 73,000 other people in the stands of Super Bowl XLI, I was having a blast.

Why was the Super Bowl so much fun, even though it was wet, crowded, wildly expensive, perverted by corporate interests and played by cookie-cutter pro athletes?

The answer reveals more about the state of sports and entertainment today than it does about me, and it should help you make a bundle over the next couple of years by betting on companies such as

Walt Disney

(DIS) - Get Report

that deliver a virtual version of that experience via television, movies and theme parks.

Disney, which I believe is a screaming buy right now, reported fiscal-first-quarter earnings last night of $1.7 billion on a record $9.7 billion in sales, blowing away expectations and lifting Disney above its media peers in ways old Walt could have only dreamed.

A Multimedia Experience

If there is one thing that Disney understands more than any other company, it's the extent to which we are social beings hard-wired to crave companionship and thrills, no matter how manipulated. Yet the hours we spend enjoying live sports, arts and adventures with family and friends are diminishing, according to researchers.

Much of the entertainment that we experience today is done not only in leisure, from the comfort of our living-room couches, but also at our leisure, through the benefit of video recording devices.

A visit to an awesome American spectacle such as the Super Bowl, though, gives you a taste of exactly what has been lost. It's so much more enthralling than it appears on television, which puts you at the mercy of the eyes and ears of cameramen and a studio director.

No home-TV theater can recreate the ear-splitting thrill of four fighter jets screaming over a stadium, the sound of a football hitting a kick returner's chest, the smell of the fireworks, the sheer energy of Prince's electric guitar played through a wall of 30-foot speakers or the dramatic visual development of a passing play on third and 10.

Disney and other broadcasters, such as

CBS

(CBS) - Get Report

and

News Corp.

(NWS) - Get Report

, recognize that we want to share in that moment -- in some fashion, anyway -- and have turned their creative genius on a process that corporate anthropologists call "disintermediation," or a way to fake the sports-and-entertainment consumer into thinking he is experiencing a major event -- and make a lot of money off the subterfuge.

Entertainment is now one of the fastest-growing segments of the economy, and advertising sales are clocking in with 4.5% annual growth, well in excess of the broad economy.

Disney, the owner of broadcaster ABC and sports cable network ESPN, is the best at this effort, and it has become the most rewarded by investors. Yet it still has a ways to go, and I believe the stock can double by 2011 if all goes according to plan.

Made in U.S.A.

How? Well, ever since the company jettisoned stuck-in-the-mud former CEO Michael Eisner, Disney has become a pioneer in the distribution of entertainment into a dozen forms, each profitable in its own way, from broadcasting and cable TV to movie theaters, DVD players, personal video devices and cell phones. Yet because it has also recognized the value of gathering people in one place for some communal experiences, Disney also is making an amazing amount of money on its theme parks.

I could make the case, indeed, that Disney has become one of the greatest stocks to own in this era, much as

Intel

(INTC) - Get Report

,

Wal-Mart Stores

(WMT) - Get Report

and

Merck

(MRK) - Get Report

were leaders of past decades.

Through hard work, genius and a bit of luck, Disney's executives figured out that proprietary content and delivery systems -- that is, manufactured experiences and their conveyances -- would generate hundreds of millions of dollars in advertising revenue in the 2000s, because they are among the few valuable things left in this country that cannot be commoditized or outsourced.

There is no cheap, Chinese-made or generic substitute for

Lost

,

SportsCenter

,

Monday Night Football

or

Pirates of the Caribbean

, just as there wasn't in a prior era for Mickey Mouse or Donald Duck. There is only the genuine article, and it is something that relentless Disney marketers work hard to make you want in half a dozen different visual and audio forms, not to mention the theme-park ride, plush toy and ring tone.

Robert Iger, the brilliant CEO in Burbank, Calif., for the past two years, has pointed out that the company was a trailblazer in the 1950s, as well, when it found new ways to deliver content through television, much to the chagrin of theater owners.

More recently, Iger noticed that consumers really liked the idea of downloading content off the Internet and wanted more of it, so he obliged. The rest is history. Nearly 20 million streams of Disney's television shows have been downloaded over the past 12 months at the iTunes site run by

Apple

(AAPL) - Get Report

. And since expanding its iTunes menu to include movies in October, Disney has sold 1.3 million copies of Disney films via download.

This is just the start, according to Iger, as he has told reporters he believes digital distribution will give the company "more opportunities than we could ever have imagined in terms of reaching more people more often with our great branded content."

No Fears of Cannibalism

While rivals such as

Sony

(SNE) - Get Report

have sat on the sidelines for fear of cannibalizing revenue sources such as DVDs, Disney has made a bundle. Check this out: Over the past three months, the two most frequently downloaded movies on iTunes,

Pirates of the Caribbean

and

Cars

, also had massive DVD sales -- an estimated 35 million units combined -- far exceeding analyst expectations. The lesson for the wallflowers of the industry is that by allowing your content to follow the consumer to new media outlets, you can grow the total size of the revenue pie.

The company's latest big project is a complete revamp of its Web site, with more videos, cooler games and a form of social networking for kids. The site, already the most popular for children, allows visitors to personalize its appearance by cartoon character with a single click via an interface whose design enraptured Apple design guru and Chairman Steve Jobs, a new Disney board member.

The company says it has spent so much effort on the site not just to expand consumption opportunities for Disney media at present but because it believes Web-enabled computer media are quickly becoming the primary entertainment experience for children -- and it wants to hook them for the future.

Overseas, Disney has done a great job recently of hooking newly emergent middle classes in Brazil, Russia, India and China, using its strong brand recognition to create localized versions of its U.S. programs. An example is a Portuguese version of

Desperate Housewives

, which is not just the ABC show with subtitles.

These and other growth initiatives will help Disney grow sales by at least 12% a year through 2011, in my estimation. Add an energetic share-buyback program, improving expense management, low debt, the leverage of top global brands and well-executed technology investments, and Disney shares -- which are relatively cheap at 16 times 2008 earnings estimates -- should be considered a core holding for investors today.

Innovation and guts have their rewards. Buy some Disney shares now, and figure they have the potential to reach the mid-$70s over the next four years. With any luck, you may be able to sell some next year and use the profits to buy tickets to Super Bowl XLII in Arizona. Although there's no way to be certain, I can at least promise you won't get soaked.

At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.

Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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to send him an email.