Disney’s Results Mixed – Is This an Opportunity?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Walt Disney Company (NYSE: DIS) has come a long way from its humble beginnings as an animation studio. It is now a global media powerhouse, with brands like ESPN, Pixar, and Marvel in its stable. Their Q1 fiscal report was mixed, missing on expected revenue but beating on earnings. The question is simple; does Wall Street’s disappointment create a buying opportunity worth taking advantage of? I think it does. I also regret not taking advantage of the price slide last October, but that’s another story.
First, let’s take a look at the most recent earnings report. As I mentioned earlier revenue fell short of expectations, coming in at $10.78 billion versus the $11.18 billion expectation. Revenue was up only 1% from the previous year’s quarter. Earnings were much more encouraging, with a 12% increase year over year. Fully diluted earnings per share came in at $0.80, an 18% increase over the previous year’s quarter.
The company’s biggest segment, Media Networks, experienced 3% revenue growth. This segment includes the Disney Channels, ESPN and ABC. Advertising revenues at both ESPN and ABC were flat, though the company was able to charge higher rates. Both networks experienced rating declines that offset the higher rates. The NBA lockout put a damper on revenues, as did the shift of FBS Bowl games to January. Disney’s first quarter ends on December 31st, so the impact of the bowl games was shifted into Q2.
Parks and Resorts reported a 10% rise in revenue to $3.2 billion and operating income for the segment was up 18%. This gain was driven by higher spending and higher attendance as well as the full quarter results of the Disney Dream cruise ship. The cruise ship was launched in the first quarter of last year, so this is its first full quarter of results in Q1. The consumer-products division posted a 3% gain, but operating income was basically flat. Studio Entertainment revenues were down 16% to $1.6 billion due to fewer Disney branded titles in the quarter. The quarter was definitely mixed, but I think it offers more good than bad.
The Reason’s For
Disney’s content is top notch. They own characters that have a lasting impact on children and adults alike and the recent acquisition of Marvel Entertainment has helped bolster this significantly. The slate of Marvel movies in the pipeline should perform well, especially the Avengers movie, which is tied to the successful Iron Man franchise. ESPN is also head and shoulders above the field in terms of sports content. There isn’t a legitimate national competitor and it is continuing to expand its footprint. Both ABC and ESPN are commanding higher ad rates as well.
The parks and resorts are also premier locations and offer a global footprint for the company. While Disneyland Paris underperformed this quarter on labor costs, the Hong Kong Disneyland Resort had strong results across the board with increased spending and attendance. The company is also launching a second cruise ship in the second quarter, which should be a long-term positive effect on revenue growth.
And then there is the Disney/Univision rumor. If Disney is in fact looking to build a 24-hour news network that is targeted at the growing Hispanic market, I think this is a long-term positive. As it stands, Disney is the only one, among the companies that own the 4 major broadcast networks, without a 24-hour news network.
The Reason’s Against
I’ll play devil’s advocate and point to some problems with Disney. Disney’s previous content has been top-notch, but what’s to say they can continue making hit after hit? Sure they’ve had unparalleled success in animation, but the formula isn’t the same. There is significantly more competition and development is costly, particularly if the resulting movie is a flop. And there have definitely been flops – Does “Mars Needs Moms” ring a bell? It doesn’t? I’m sure Disney is glad people have already forgotten that one but it was a costly mistake. ABC and ESPN command higher advertising rates, but they lost ratings this quarter that offset the gains, so what’s so exciting about that? People have increasing options away from cable and cable is where Disney’s largest segment makes a lot of its money, isn’t cord-cutting going to hurt them?
The Bottom Line
Disney is in a strong position to benefit from economic growth. If the euro-crisis is resolved without bleeding significantly into the other regions, Disney’s parks and products will benefit. Disney has also recognized that their strategy of just producing content for content’s sake is not the answer, and has since worked on scaling back their studio productions in an effort to focus on stronger offerings. In the earnings conference call, CEO Bob Iger highlighted the strategy – fewer movies, stronger content, preferably content that franchises well. While this strategy doesn’t guarantee they avoid flops completely, I think it does point to a company that is paying attention and willing to change strategies to what the market demands.
ABC and ESPN had weaker ratings than expected, but part of that was due to circumstances they could not avoid. As I addressed earlier, some of their prime content, the FBS bowl games, were shifted out of the quarter and will show up in the second quarter. The NBA lockout also robbed its broadcast networks of content, and forced them to significantly alter programming. The lockout has since been resolved and I expect to see a return to normalcy for their ratings. Additionally, though ABC’s ratings declined for the quarter, they have introduced strong programming that is gaining steam, I expect ratings to shift the other way.
Cord cutting is an interesting one. Yes, there is a trend away from cable, but Disney is already participating through the Hulu joint venture. There is also the content issue. Disney’s library of content puts them in a strong position to negotiate higher rates as more competitors joint Netflix (NASDAQ: NFLX) in the content delivery space. As it stands, Netflix scuttled negotiations and no longer has access to Disney’s library, which is likely to be a significant loss going forward. I expect Netflix to renegotiate with Disney down the road and to pay higher rates given the increased competition. During Disney’s conference call, one of the analysts asked what they thought about the Coinstar (NASDAQ: CSTR) and Verizon (NYSE: VZ) venture that aims to compete with Netflix and the response was telling. The response was simple; the company thinks it sounds like another opportunity to sell their high quality content. Not many more details are available about the Coinstar/Verizon venture, but Disney's response is clear, they'll need content and Disney will sell it to them. I think as the streaming business becomes more competitive, the proven content producers have a long-term advantage and Disney has a very deep library.
In the end, I’m long Disney because of content. As we move toward streaming media and smart devices continue to proliferate, content is king and content is one thing Disney does well. The company has proven its ability to develop content and then leverage that content into a wide array of products. Disney has an eye to the future in everything it does and should perform well going forward. It doesn’t hurt that their stock is trading at a relatively low PE of 15.98 and has a dividend yield of 1.46%.
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