Share price: $137 Target price: $165
Position size: 2% 1 yr. return: 20%
Disney reported strong Q4 results. Revenue was in-line and they beat on EPS $1.07 vs street $0.95. Reiterated the guidance of DTC for Disney+, Hulu and ESPN+ that was given at the April Investor Day. They also had positive commentary around early results of Disney+ in the Netherlands and have announced new partnerships w/ Amazon Fire, Samsung and LG for streaming Disney+.
Key takeaways:
· Better than expected op income driven mostly by Parks (includes consumer products) and Studio. Studio performance driven by Lion King, Toy Story 4, and Aladdin.
· Better consumer products op income was due to growth in merchandise licensing w/ Frozen and Toy Story merchandise. Better parks op income was driven by their strategy of managing yield (i.e. dynamic pricing) to drive greater profitability. Domestic park attendance was comparable to Q4 last year, and reflects the impact of Hurricane Dorian, which adversely impacted attendance growth by about 1%. Per capita guest spending was up 5% on higher admissions, merchandise and food and beverage spending. So far this quarter, domestic resort reservations were flat YoY. Mgmt says guests are deferring visits to Disney Land and Walt Disney World until the complete opening of Galaxy’s Edge at those respective locations. While int’l parks are being negatively impacted by Hong Kong protests, it was offset by growth in Paris and Shanghai parks.
· Expectations for Disney+, which launches next week, are increasing given new partnerships, better visibility into robust slate of exclusive content, earlier than expected launch in Western Europe and positive commentary around testing in the Netherlands.
· Launch next week is in US, Canada and Netherlands, then Australia and New Zealand the following week and Western Europe in March.
· The new Star Wars series, The Mandalorian, which will be available at launch and exclusive to Disney+ is being heavily hyped after early screening of the first episode. Link to Mandalorian trailer: https://www.youtube.com/watch?v=XmI7WKrAtqs
· Disney+ distribution partners include: Apple, Amazon, Roku, Samsung, Google, Microsoft, Sony, LG.
· Media networks – cable subs down 4% YoY, driven by cord-cutting and in line w/ peers. ESPN+ now has >3.5m subs – up almost 50% QoQ. Hulu now at 28.5m subs and mgmt. announced that FX network will now be exclusive to Hulu for streaming. Additionally, FX will produce new original series exclusively for Hulu, starting with 4 new series in 2020.
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