Disney Quarterly Update

Disney reported their 2016 Q4 earnings yesterday. Their earnings and revenues not only missed estimates, but were actually down YOY. Shares have responded to the long term bullishness espoused by CEO Iger during the conference call however:

Walt Disney Co (DIS.N) executives promised earnings growth for the next two years, easing investor concerns over a quarterly drop in ad sales and subscribers at its ESPN sports network, sending the media company’s shares up in after-hours trading.

Executives said they expected modest earnings per share growth in fiscal 2017 and “more robust growth” in fiscal 2018 and beyond, as ESPN attracts more online viewers, the new Shanghai theme park lures visitors and the movie studio releases more “Star Wars” installments and other films.

Disney and media rivals face challenges from “cord cutters” who are dropping TV subscriptions for cheaper and more convenient online services, and the issue is especially important for ESPN, one of Disney’s most important brands.

“We are extremely confident that we’ll continue to deliver significant long-term growth,” Chief Executive Bob Iger said.

Read the whole thing at http://www.reuters.com/article/us-walt-disney-results-idUSKB…

Here’s an updated look at theirrevenue ad EPS growth numbers:

Revenue (billions)		Q1		Q2		Q3		Q4
2013				11.341		10.554		11.578		11.568
2014				12.309		11.649		12.466		12.389
2015				13.391		12.461		13.101		13.512	
2016				15.244		12.969		14.277		13.142

EPS (Adjusted)			Q1		Q2		Q3		Q4
2013				0.79		0.79		1.03		0.77
2014				1.04		1.11		1.28		0.89
2015				1.27		1.23		1.45		1.20
2016				1.63		1.36		1.62		1.10

Free Cash Flow (billions)	Q1		Q2		Q3		Q4
2013				0.559		1.586		2.723		1.748
2014				0.554		1.826		2.047		2.042
2015				0.857		2.011		1.652		2.124
2016				0.956		2.250		2.489		2.745

2016 Q4 Earnings (Current):

Revenue Growth (billions)
2015 Q4 TTM Revenue = 52.465
2016 Q4 TTM Revenue = 55.632
Year Over Year Revenue Growth = 6%, previous quarter 9.1%

EPS Growth (adjusted)
2015 Q4 TTM Earnings = 5.15
2016 Q4 TTM Earnings = 5.71
Year Over Year EPS Growth = 10.9%, previous quarter 20%

P/E (Check Current Price) = 94.96/5.71 = 16.63

1YPEG = 16.63/10.9 = 1.53

Important note: There was one week less in 2016 Q4 than in 2015 Q4, impacting EPS by about $0.13.

Revenue was up in two of the company’s four main segments, slightly down in one, and down by the mid-teens in another:

Media networks: $5.66B, (3%) YOY
Parks and Resorts: $4.39B, +1% YOY
Studio Entertainment: $1.81B, +2% YOY
Consumer Products: $1.29B, (17%) YOY

Operating Income was down in all four categories:

Media networks: $1.67B, (8%) YOY
Parks and Resorts: $700M, (5%) YOY
Studio Entertainment: $381M, (28%) YOY
Consumer Products: $424M, (5%) YOY

Media Networks. Decreases in revenue and earnings for the media networks segment was driven by lower advertising and affiliate revenues, higher production and programming costs at ESPN. ESPN’s lower advertising was driven by fewer viewers and lower rates.

Parks and Resorts. A decrease in operating earnings was primarily driven by lower attendance at Disneyland Paris and Hong Kong Disneyland. This was partially offset by Shanghai Disney’s first full quarter. Domestic operations were up this quarter, led by higher growth spending and a decrease in costs at Walt Disney World Resort in Orlando.

Studio Entertainment. Basically Pete’s Dragon and Queen Katwe underperformed. TV/SVOD distribution increased primarily due to the sale of the Star Wars Classic titles this past quarter.

Consumer Products. The decline in revenues was almost entirely due to their discontinuation of the Infinity game console business. Frozen licensing declined which was partially offset by an increase in Finding Dory/Nemo licensing.

See the full report at https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings…

Conclusion: There’s no need to sugarcoat this: Disney had a disappointing quarter. Yes, some of it was due to the shorter quarter (last year’s fourth quarter was a week longer), but not all of it was. That the stock is up by a couple percentage points after a quarter like this only shows how beaten up the stock price was. But this remains a long term story vs. a short term story as Iger reiterated throughout the call.

I’m not at all worried about studio revenues. Over the past decade with meaningful acquisitions including Pixar, Lucasfilms, and Marvel, Disney has positioned themselves to release blockbusters every single quarter, every single year. These properties all have movie franchises that can be used for years and years to come. These movies will drive park attendance, toy purchases, and television shows too. Will there be an occasional miss along the way? Of course. That’s what we had last quarter. But this quarter should be much better with a major Pixar and Star Wars release scheduled. And while 2017 is up against tough comps, 2018 looks to be another huge year. What other studio can release a schedule of feature films with such confidence?

Major park attractions are being added to in the years to come. Star Wars-themed areas in existing parks are coming to California and Orlando. Ditto with major Pixar-themed attractions. And, of course, Shanghai Disney is just getting started. This should hopefully drive higher revenues in this segment, but Disney can’t take its eye off the ball at other international properties like those found in Paris and Hong Kong. If it neglects those properties we see how that can drag the entire sector down. One quarter does not a trend make, but we should keep an eye on these properties to make sure they don’t continually go down.

ESPN remains a thorn in disney’s side, but there was perhaps no better news when Iger stated on the call that he thought the subscription losses were finally abating. He was brutally honest last year when the subscription losses started (almost too honest) so I think we can trust him now. And catalysts for their cable networks are abundant. Next year they will offer a “skinny bundle” on Hulu in partnership with Fox. Sling TV and other skinny bundles appear popular. And a separate streaming ESPN service is still in play.

Yes, NFL ratings are down but college football ratings are up. The more expensive NBA contract started this year, but its good for years and years (through the 2024-25 season). And it also greatly expands ESPN’s televising and streaming rights to the content. Three more quarters and Disney will lap this expense.

I don’t think this is a bad time to add, but I also don’t think there’s a particular rush. Long term, I remain incredibly bullish on Disney. Remember, these are just my opinions and I’m just an average investor with a mediocre track record.

Long DIS
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Is that growth in Cash Flow a silver lining? Just wondering how you see that. It’s pretty big growth compared to either EPS or Revenue.

I’d also like to point out that the fairly aggressive share repurchase program has a decently large impact on value here as well. I see on their press release that avg for September quarter was 1615M shares outstanding, and that last year the number was 1694M. So they have 4.7% fewer shares in just 12 months. If you bought at 116.50/share a year ago, you were buying a $197B company. If you buy at the current price of 97.70, you’re buying a $158B company.

So DIS stock is 20% cheaper than it was a year ago. I’m not calling a bottom or anything, but I think there’s more upside than downside from here.



Is that growth in Cash Flow a silver lining? Just wondering how you see that.

Honestly, I haven’t studied Disney’s free cash flow enough to feel like I could give an informed opinion. Off the top of my head, and this is just me speculating, I would imagine Disney’s FCF would ebb and flow based on their acquisitions and park project spending.

I’d also like to point out that the fairly aggressive share repurchase program…

Disney has an interesting and effective stock buyback strategy that it has used to make some of its shrewd acquisitions (note the article is from a couple of years ago):

Another reason why someone might get deterred from the stock is that, at first glance, the buyback appears to be ineffective: Disney had 2 billion shares outstanding in 1998, and now has 1.75 billion shares outstanding in 2014. For a company spending $4-$5 billion repurchasing stock each year, you’d like to see a share count declining faster than that.

If you are really paying attention to Disney closely, as someone might be if they have been holding the stock for years and years, then you would know what Disney is doing here: they are aggressively taking shares of its stock off the market and then using to make targeted acquisitions that increase total profits without adding to the number of stockholders entitled to the profits.

That’s something that can be easy to miss if you’re not paying close attention—at most companies, we’re trained to associate stock buybacks with lower share counts which give you a higher claim on the profits for the shares that you own. Disney’s strategy tweaks that principle a bit; the stock buyback allows Disney to gobble up other companies that add to overall profits without having to expand the share count commensurately. In other words, when Disney does something like buy LucasFilm, they use repurchased shares to do so—those $300 million in annual profits continue to be divided in 1.8 billion ways instead of having to divide them in 1.9 billion ways if the share count actually got diluted.

Read the whole thing at http://theconservativeincomeinvestor.com/2014/10/27/what-shr…

Long DIS
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx