Disney continues to execute as it preps its streaming services
After Tuesday’s market close, Content is King investment theme company Walt Disney (DIS) reported stronger than expected March quarter results with EPS besting expectations by $0.14 per share. For the quarter, Disney reported EPS of $1.84 vs the consensus forecast of $1.70 and the $1.50 delivered in the year-ago quarter, which means year over year EPS improved 23%. While better than expected revenue of $14.5 billion for the quarter, up 9% year over year and ahead of the expected $14.1 billion for the quarter, aided the EPS beat so too did the 5% decline in the outstanding share count and the lower tax rate (20.7% vs. 32.3%) in the year-ago quarter.
That revenue and buyback combination offset overall operating profit margin declines that reflected softer margins at the Media Networks (42% of sales, 49% of operating profit) and Consumer Products & Interactive Media (7% of sales, 8% of operating profit) despite solid margin improvement at both Parks & Resorts (34% of sales, 23% of operating profit) and Studio Entertainment (17% of sales, 20% of operating profit).
Sifting through all of the segment results and assessing the below the operating line influences, we find that year over year Disney’s operating profit rose 6% with the business spitting out free cash flow of $3.5 billion, up nearly 50% year over year.
More high profile movies are on the way…
It’s pretty much business as usual for Disney, and during the earnings conference call CEO Bob Iger shared an upbeat outlook across the Studio Entertainment and the Parks and Resorts businesses. More specifically for the Studio Entertainment business, on the heels of the newest Avengers film that is breaking box office records, Solo: A Star Wars Story, is generating a lot of interest and strong buzz ahead of its Memorial Day weekend opening. Disney will follow that with a dozen high profile movies over the next 18 months, including Incredibles 2, Ant-Man and the Wasp, Ralph Breaks the Internet, Mary Poppins Returns, Captain Marvel, Dumbo, Avengers 4, Aladdin, Toy Story 4, The Lion King, Frozen 2 and Star Wars Episode IX.
…that will drive Disney’s other businesses
With Disney merging its Parks & Resorts business with its Consumer Products business, the new combined entity stands to benefit from the coming onslaught in content from Studio Entertainment across its licensing business as well as new attractions at the Parks. Those new attractions include the Toy Story Land that’s about to open in Florida next month, the one that just opened in Shanghai, updated cruise ships, Star Wars: Galaxy’s Edge will open in both Disneyland and Disney World by the end of calendar 2019 plus multiple hotels around the world and new lands in the Paris and Tokyo parks. I see that as more reasons for people to return to the Disney Parks in the coming years.
ESPN Plus has launched
Turning to ESPN, the company recently launched its ESPN Plus Service, a streaming sports service, and while it was mum on details given the brief time it’s been in the marketplace, management said it was encouraged by initial results. The team also noted that it recently inked a deal to add UFC content to the Plus service and that it will continue to both invest and license sports content for both live and non-live sports.
And about that pending transaction with FOX
In terms of the pending transaction with 21st Century Fox (FOXA), Disney shared that it is still deep in the process, including on the regulatory front, and it could not add more at this time. Even so, Iger went on to share some high-level synergies to be had, particularly from a content side when describing ESPN Plus, Disney’s own direct to consumer streaming service that will launch in late 2019 as well as Hulu of which it will own some 60%. As part of those comments, Iger also answered a lingering question over that Disney branded streaming service – that it will be anchored by Disney, Marvel, Pixar and Star Wars content.
In recent days, Comcast (CMCSA) appears to have thrown its hat back into the ring for the Fox business. I’ll be watching the developments, and what it means for a Disney-Fox combination, which in my view would serve to improve Disney’s content and character library, serving to quickly build a formidable set of direct to consumer streaming services. Next to this is we are waiting to see if the U.S. government approves AT&T’s (T) acquisition of Time Warner (TWX).
Viewing these pending transactions together, we continue to see a transformation when it comes to content creation as well as transmission. I see it as a coming together of our Connected Society investing theme with Content is King to form a new theme in and around our growing digital lifestyle. More on that as I flesh that thought out further in the coming weeks.
Bottom line – Disney is doing what it does
To sum it up, Disney is doing what it does – generating tentpole franchise content at the box office and then using that same content to increasingly fueling its consumer products and parks business. As Disney continues to do this, in the coming quarter Disney will look to expand its streaming services, and if successful those subscription businesses are successful, it will add greater visibility and predictability to the company’s revenue and earnings stream as well as cash generation that will be used to buyback shares and re-invest in the company’s businesses. Should that come to pass, Disney will be tapping into our Connected Society investing theme in a way similar to Netflix (NFLX) and I suspect investors will look to re-think valuation multiples for the shares vs. the current multiple of 14.5x 2018 earnings that are poised to grow 21% year over year.
- Our long-term price target on DIS shares remains $120.