May 30, 2010 in Business

Disney’s media empire is firing on all cylinders

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Disney (NYSE: DIS) is back. The family entertainment giant recently posted better-than-expected second-quarter results, with revenue up 6 percent over year-ago levels to $8.6 billion, and adjusted earnings up 12 percent.

Three months ago, just one of Disney’s five subsidiaries – media networks – posted year-over-year quarterly revenue growth. This time, all five posted top-line growth.

A slip in operating profits in the Theme Parks and Resorts division stemmed from healthy promotional activity and higher fuel costs for Disney Cruise Line vessels. Strength in Disney’s cable properties helped offset a 24 percent slide in broadcasting operating profits at ABC.

However, the balance of Disney’s media conglomerate is humming along nicely. The success of “Iron Man 2” and the near-certain success of the upcoming “Toy Story 3” validate the company’s acquisitions of Marvel and Pixar. Sequels are also on the way for “Cars” and “Monsters, Inc.”

The appetite for Disney’s product also remains strong; its ABC streaming application has been one of the more popular iPad downloads.

Disney’s decision to wean tourists off deep theme-park resort discounts will be a cliffhanger to watch during the summer, but it’s hard to bet against Disney when the company’s starting to fire on all cylinders.

Ask the Fool

Q: Is something wrong if a company has a return on equity above 100 percent? – S.B., Nashua, N.H.

A: Not necessarily. The return on equity (ROE) reflects the productivity of the net assets (assets minus liabilities) that a company’s management has at its disposal. Simplified, it’s a ratio dividing net income by shareholder equity, which is another term for net assets.

(Net income is found on a company’s income statement. Shareholder equity is found on the balance sheet, and it’s also what you get when you subtract liabilities from assets.)

A company’s ROE can be skewed by high debt levels. Tempur-Pedic International, for example, recently reported ROE above 100 percent.

A glance at its balance sheet explains much of that – about $38 million in cash and $393 million in debt.

Debt can be worrisome unless a company seems able to pay it down.

My dumbest investment

When I was new to investing, I fell for an e-mail pitch from an online penny stock “investment adviser” who appeared to offer knowledgeable advice about up-and-coming stocks that were going to go “through the roof” very soon.

I liked that I could buy 1,000 shares for only $1,250. What I didn’t do was read the fine print at the end of the solicitation, where I would have learned that the company had paid the website $50,000 to promote its stock. I ended up selling my shares for a total of $15. I think the company is still in litigation. Some of life’s lessons are expensive. – L.C.L., Minneapolis

The Fool responds: You’re lucky to have lost only that much when the stock went through the floor instead of through the roof. Many investors suffer through much more costly lessons.

Be wary of stocks that trade for only a few dollars or pennies per share, and don’t believe anyone promising “through the roof” results.

The best way to get rich with stocks is to buy into healthy, growing companies you understand well and to hang on.

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