Disney's Film Slate Makes the Stock Almost Irresistible

NEW YORK (TheStreet) -- The Walt Disney Co.'s (DIS) film slate keeps on giving, and with it there's a consistent appeal for investors who appreciate the power of its Marvel studio behind the record-setting box-office performance this past weekend of Avengers: Age of Ultron.

The share price of the Burbank, Calif.-based was gaining nearly 1% on Tuesday, rising to $112.09, extending gains for the year to date about 19%, following the company's reporting of second-quarter revenue that exceeded expectations.

Disney investors can now look forward to not only more Marvel film releases but also the Dec. 18 release of Star Wars: The Force Awakens, two more Star Wars movies as part of a newly formed trilogy, as well as Frozen 2, a sequel to the highest grossing animated film of all time. Each film promises to be close as a movie studio can aim to planning a guaranteed hit. And for Disney, there's also the potential for outsized merchandise sales.

But while the direction of Disney's movie business is largely clear, its television strategy remains in transition. CEO Robert Iger said he is pleased with Disney's arrangement with the Internet-based video-streaming service of Dish Network  (DISH), Sling TV, one of a handful of new "skinny bundle" offerings that bypass pay TV. Iger said he chose not to include Disney channel on Sony's (SNE) PlayStation Vue, explaining that the terms of a proposed arrangement weren't attractive. 

Iger was even less enamored with what's transpired between his company and Verizon Communciations (VZ). ESPN -- which Disney owns 80% of -- sued Verizon last week over its new FiOS Custom TV skinny bundle offering. Verizon's Custom TV plans lets customers purchase a skinny bundle of a smaller selection of TV channels and add other channels such as ESPN through "channel packs," which can be changed each month.

"We were simply asking them to adhere to the contract that they had negotiated with us," Iger said of the Verizon dispute.

Customers may be wary of shifting to skinny bundles because when they unbundle broadband services from whatever service packages they have, the cost of broadband increases significantly, Iger said.

"One of the questions that has yet to be answered is how large does the savings have to be for the consumer to essentially abandon the expanded basic package and the choice that it gives for some less expensive package with far less choice," he said. "The jury is still out," he said.

Despite the fact that advertising revenue has largely shifted from traditional media to new media, Iger said he continued to see technology and innovation as positives. "Our exposure to these changes is less than a lot of the other media companies," he said.

Pessimists might argue that Star Wars films are no longer sure bets. "There's a whole generation that wasn't born for the last round of films," Bank of America analyst Jessica Reif Cohen pointed out on Tuesday's call.

Disney reported results for the second quarter (that ended March 28) that were better than analysts had expected, driven by its studio-entertainment division that includes film. Total revenue grew 7% from a year ago, to $12.5 billion, while profit increased 10% to $2.1 billion, or $1.23 a share (up from $1.08). The forecast of analysts overall had been revenue of $12.3 billion and profit of $1.8 billion, or $1.11 a share.

Similar to the prior quarter, Disney had better-than-expected performance from its studio entertainment to thank for the overall results exceeding projections, said Stifel analyst Benjamin Mogil in a research note. Traditional broadcast results were also stronger than expected, thanks in part to increased affiliate fees, while ESPN advertising was up in rate and volume, he said, rating Disney stock a buy.

But Disney's studio-entertainment revenue declined 6%, to $1.7 billion. That occurred mainly as a result of a lack of a huge new theatrical release in the quarter and the inability of best-animated feature Oscar winner Big Hero 6 to match the domestic home entertainment and international theatrical performance of Frozen a year ago, Disney said.

Investors may have to wait for the third quarter for Disney's strong film slate to send its results truly soaring. Age of Ultron is expected to play a big role in the company's performance then.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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