Description

The Walt Disney Company (NYSE:DIS) is an entertainment company. The Company operates in four business segments:

1. Media Networks: includes cable and broadcast television networks, television production and distribution operations, television and radio stations.
2. Parks and Resorts: company designs and develops new theme park concepts and attractions and resort properties.
3. Studio Entertainment: acquires live-action and animated motion pictures, direct to video content, musical recordings and live stage plays. It also develops and publishes games, books, magazines and comic books.
4. Consumer Products & Interactive Media: distributes merchandise directly through retail, online and wholesale businesses. These activities are performed through its retail, games and publishing businesses.

Largest profit contributors are Media Networks (49.14%), which is made of Cable networks as well as broadcasting, Parks and Resorts (22.52%) and Studio Entertainment (20.00%).

Source: Thomson Reuters

Results Highlights

DIS reported better than expected results for 2Q18

• EPS of USD1.84 (up 23% YoY) beating consensus estimates of USD1.70
• Revenue of USD14.60bn (up 9.4% YoY) beating consensus estimates of USD14.11bn
• Free cash flow was up 48% YoY, mostly due to a net benefit from the new Tax Act

Investment Rationale

DIS continues to remain the king of content, with its ownership of strong Intellectual Properties (IPs). They have also managed to make effective use of these IPs to generate revenue through their Movie offerings as well as draw visitors to their Parks and Resorts, which are both up double digits YoY. ESPN, while dipped in subscribers again, was less of a drag on earnings this quarter. We remain positive that when DIS launches its streaming service in late 2019, that its strong IPs will help draw subscribers and are positive on the stock.

Results Summary

1. Studio Entertainment revenue was up 21% YoY: DIS managed to increase their revenue for the quarter from their Studio offerings by 21% to USD2.5bn and the operating income by 29% to USD847mn. Black Panther was hugely successful, having the 6^th highest USA opening weekend at USD202mn and the 9^th highest worldwide gross box office at USD1.34bn (Not final numbers as Black Panther is still showing in theaters). Other significant titles that released in the current quarter were Thor: Ragnarok, which grossed USD854mn worldwide, and Coco, which grossed USD804mn worldwide. DIS also reaped the rewards of high DVD/Blu-ray sales of Star Wars: The Last Jedi.

Of note is that DIS’s latest Marvel offering, the hugely successful Avengers: Infinity War, released on 27^th April and as such has not been included in this quarter’s results. The film has smashed records by overtaking Star Wars: The Force Awakens (also a DIS property) to become the number 1 biggest USA opening weekend at USD257.70bn. At about 2 weeks since the release of the film, Avengers: Infinity War has crossed USD1.20bn in worldwide box office and is sitting at 15^th highest of all time. It is also important to note that the film has yet to open in China, where it will release on the 11^th of May.

2. Parks and Resorts revenue increased 13% YoY: Parks and Resorts grew revenue by 13% to USD4.9bn and the operating income increased 27% to USD1.0bn. The increase was mostly due to increase in average ticket prices as well as increased guest spending on food and lodging. Disneyland Paris and Hong Kong Disneyland Resort were reported to have been the reason for the increases, with higher occupied room nights and attendance, as well as increased in food, beverage and merchandise spending. However Shanghai Disney Resort was reported to have suffered due to lower attendance as well as unfavorable currency impact.

DIS just opened a new Toy Story Land in Shanghai Disneyland and has plans to open one in Orlando in June as well. Plans are underway to add a Star Wars themed attraction by end 2019. As such, we believe that DIS’s Parks and Resorts will continue to grow and attract more guests.

3. Cable Networks revenue increased by 5% YoY: Cable Networks revenue grew by 5% to USD4.3bn; however the operating income decreased 4% to USD1.7bn. ESPN dragged less on DIS’s results in this quarter, primarily due to growth in advertising revenue. However, losses at BAMTech dragged the Cable Networks segment lower. The operating loss was attributed to ongoing investment into the technology platform associated with ESPN+, the ESPN streaming service. DIS reported that decline in subscribers for ESPN led to a 3% decrease in revenue.

Conclusion: DIS reported strong numbers in this quarter, helped by a net benefit from the new Tax Act. While ESPN decline continues to weigh on the company’s share price, the continued strong performance of its Studio Entertainment as well as Parks and Resorts point to the strong demand for DIS’s content. We continue to believe that DIS’s effective use of its IPs will be beneficial to growing its bottom line and as such, we continue to be positive about DIS and believe it to be a strong investment.