Share price: $135 Target price: $165
Position size: 2% 1 yr. return: 35%
Disney reported a strong 2Q, beating on revenue and EPS. Revenue was $14.92B (+3% YoY) vs consensus $14.54B and EPS was $1.61 vs consensus $1.58. EPS down 13% YoY because of higher tax rate, tough studio compare, Hulu consolidation and DTC investments. Studio and DTC (direct-to-consumer) hindered 2Q growth, but Studio is already re-accelerating on its robust film slate and 3Q DTC losses guided lower than expected. The Parks segment shined in the quarter and strength here is set to continue as they open the biggest expansion in their history later this year w/ the openings of Star Wars lands at Disney World and Disneyland. Performance at Parks and Studio will help offset drag from DTC investments.
Key takeaways:
· Media networks revenue $5.53B, flat YoY. Cable Networks revenues for the quarter increased 2% to $3.7B and operating income increased 2% to $1.8B. Higher operating income was due to an increase at ESPN. Broadcasting revenues for the quarter decreased 2% to $1.8B and operating income decreased 29% to $247m. The decrease in operating income was due to higher programming costs, lower program sales and a decrease in advertising revenue, partially offset by higher affiliate revenue from contractual rate increases.
· Parks, experiences & consumer products revenue $6.2B (+5% YoY). Margin expansion in this segment continues as operating income increased 15% to $1.5B. Operating income growth for the quarter was due to growth at domestic theme parks and resorts. Domestic Parks continue to fire on all cylinders with revenue up 6% YoY. Star Wars: Galaxy’s Edge openings at Disneyland on May 31st and Disney World August 29th will help continue the successes in domestic attendance and spending gains.
· Studio entertainment revenue (-15% YoY). The decrease in theatrical distribution results was due to lapping Black Panther and Star Wars: The Last Jedi from 2Q last year with Captain Marvel and no comparable Star Wars title in the current quarter. Despite tough compares, studio should drive record summer performance w/ Avengers: Endgame, Aladdin, Toy Story 4, Lion King. This will also support growth in consumer products.
· Avengers: Endgame is now the second-highest grossing film of all time and will stream exclusively on Disney+ starting December 11th. It’s #2 only a couple weeks in, so clearly will take the #1 spot. Amazingly, movies from the Marvel Cinematic Universe (includes Black Panther) make up 5 of the top 10 grossing movies of all time.
· DTC & international revenue ~$1B, +15% YoY. Hulu now consolidated in this segment.
· $2B in merger cost synergies reiterated.
· Discussion on the call about the potential to acquire the 1/3 of Hulu that they don’t own from Comcast. Getting full ownership would help solidify int’l Hulu rollout strategy and Disney+, ESPN+, Hulu bundling strategy.
Global Box Office
Investment Thesis:
- Disney is a global media and entertainment company that owns a massive library of intellectual property.
- Their competitive advantage is their evergreen brands and synergistic business model. Disney can create content that builds off existing franchises and can be monetized across all their business, giving them the ability to create higher budget, quality content and an ever growing library of IP.
- New direct-to-consumer (DTC) initiativewill strengthen synergies between businesses and lead to structurally higher margins and higher multiple on recurring revenue business.
- Recent Fox acquisition improves their content positioning and global growth opportunities.
- High quality company with solid balance sheet, strong FCF generation and ROIC.
$DIS.US
[tag DIS]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109