After reporting mixed fiscal third-quarter (ended June 27th) results, entertainment and media conglomerate The Walt Disney Company (DIS – Free Walt Disney Stock Report) saw its shares fall sharply in early morning trading. Though the company beat our share-earnings estimates by a nickel ($1.45 versus $1.40), owing partially to a lower-than-expected share count, a disappointing top-line performance ($13.10 billion against our $13.25 call) led to the downward price movement.
Disney’s Studio Entertainment group continued to perform well. Revenues and operating income were up 13% and 15%, respectively, owing largely to the popularity of two blockbusters. With the runaway successes of Avengers: Age of Ultron, which has grossed roughly $1.4 billion worldwide since its May 1st release, as well as Pixar’s Inside Out (over $600 million), the company’s film franchises have had a stellar year so far at the box office.
Later this calendar year, the segment anticipates to set new box-office records with Star Wars: Episode VII. The long-awaited new installment to the intergalactic franchise will be released on December 17th and is expected to launch yet another lucrative franchise for Disney, which purchased Star Wars-maker Lucasfilm in 2012 for $4 billion. Already, the House of Mouse subsidiary is producing its second Star Wars film, tentatively titled Rogue One, which is set for a December, 2016 release.
Meanwhile, weak advertising in the Media Networks segment was offset by higher affiliate fees and a 32% year-to-year increase in revenues generated by streaming video licensing fees. The company partnered with Internet company Netflix (NFLX) earlier this year with the Marvel series Daredevil. The business, which includes both Disney’s broadcasting and cable operations, delivered a 4% operating profit improvement on a 5% top-line gain. The company hopes that the 2016 election cycle will spur higher advertising results in the broadcasting unit going forward.
ESPN, the company’s prized cable offering, could offer Disney a chance to enter into the stand-alone streaming market. HBO has delivered strong results to parent company Time Warner (TWX) since breaking from the traditional cable distribution paradigm earlier in the year. CEO Bob Iger even hinted at the potential in late June, saying that making the “Worldwide Leader in Sports” available directly to consumers is inevitable.
Parks & Resorts continues to exhibit strength on the heels of its cornerstone U.S. properties. That is, weakness overseas was once again more than offset by growing attendance and guest spending at DisneyLand and Disney World. Its international prospects will hopefully turn around next year when Disney opens Shanghai Disney Resort.
Finally, the Consumer Products and Interactive segments delivered mixed results. The former realized 6% and 27% growth in revenue and pre-tax profits, respectively, driven primarily by the continued success of its Frozen franchise. Sales of Anna, Else, and related merchandise should continue to support the division in tandem with Marvel heroes. Later in the year, the aforementioned Star Wars film should reinvigorate one of the premiere retail properties of American pop culture. The Interactive unit, Disney’s smallest by revenues, should experience stronger sales when said Star Wars film is released before Christmas.
All told, Disney put out a pretty solid June-quarter report. Although revenues missed the mark, the metric rose 5% from a year earlier, while the bottom line advanced 13%. However, the equity had been testing new highs for a few months, so investors appeared eager to take profits on any sign of weakness.
Content is king in the media and entertainment world, and the company’s trove of media properties is among the most popular and valuable in the industry. From its cable sports dominance via ESPN, to its studio subsidiaries like Pixar and Marvel, to its beloved line of theme parks and resorts, Disney is well positioned to leverage its brands into long-term revenue streams. The financially solid company has achieved outstanding top- and bottom-line growth over the past several years. And while we still envision big things coming down the product pipeline for Disney, we believe the growth rate will moderate somewhat going forward. In the meantime, however, we are maintaining our estimate for a 15%-20% share-net improvement in fiscal 2015.
About The Company:The Walt Disney Company operates Media Networks such as ABC and ESPN, and Studio Entertainment. Its world famous parks and resorts include Disneyland, Walt Disney World (Magic Kingdom, Epcot, and Disney’s Hollywood Studios), while the company earns royalties from Tokyo Disneyland and manages Disneyland Resort Paris and Hong Kong Disneyland. It also operates a cruise line and Consumer Products and Interactive Media segments. ABC was acquired in February, 1996; Pixar in May, 2006; and Marvel in December, 2009.