Walt Disney: 5-Star Buy In Entertainment

We expect the company, as a cyclical bellwether, to be a major beneficiary of a global macroeconomic rebound, with improving fundamentals across virtually all of its core businesses.

Disney, we believe, offers a relatively balanced asset mix that typically performs well ahead of a cyclical economic upturn, while leaving it relatively exposed to an economic downturn.

Our investment opinion reflects what we see as Disney's execution of a proven, multi-platform strategy for content exploitation that strikes a balance between organic growth and acquisitions.

Over the years, Disney has grown internally and acquired a stable of lucrative content franchises including Mickey Mouse, Disney Princess, Toy Story, Lion King, Pirates of the Caribbean, Cars, Avengers, Star Wars, and several others.

Under a management team led by Chief Executive Robert Iger, Disney has been at the forefront of embracing newer digital outlets, most recently in a film output deal with Netflix.

Also, concerted efforts are under way to expand into emerging markets such as India, Russia, Latin America, and China, which recently eased its film restrictions. Disney is planning to open its new Shanghai theme park, a joint venture with the Chinese government, in 2015.

With a recent stabilization in key operating metrics at the worldwide theme parks, we expect a substantially completed multi-year cycle of capital upgrades at the parks — including new attractions at Disney California Adventure, Disney World and Hong Kong Disneyland, as well as two new cruise ships — to sustain double-digit returns on invested capital.

We believe the media networks businesses will remain the primary near-term catalyst for the company's financial performance, mainly driven by relatively healthy advertising trends for ESPN and ABC networks and stations, as well as higher affiliate rates for ESPN and Disney Channels (on multi-year renewals of pay TV carriage deals).

We forecast about 6% and 7% growth in fiscal 2013 and 2014 consolidated revenues, respectively, to about $44.8 billion and $47.8 billion.

Further margin expansion should reflect improved operating leverage from recent restructuring actions, increased exploitation of worldwide licensing opportunities, and further theme parks cost savings (including employee benefit expenses).

Results should also benefit from a ramp-up of higher-margin (and relatively nascent) revenue streams — including digital streaming deals with subscriptions video-on-demand providers.