Disney: 1Q20 Review

by The Compound Investor

It’s an exciting time to be a Disney (DIS) stockholder. I mean between its movie studios, streaming services, new theme park attractions and incorporating the 21st Century Fox assets (“21CF’) there’s just a heck of a lot going on right now. In fact I don’t even know where to begin with first quarter 2020 financial results (“1Q20”) coming out of Burbank yesterday (Disney runs on a September fiscal calendar remember).

Headline numbers are still a bit of a mess due to the 21CF deal so let’s get those out of the way first. Total net profit for the first quarter clocked in at circa $2,200m ($1.17 per share), down around $675m on this point last year. Now, that drop includes a bunch of non-recurring items. Taking those out of the equation results in underlying profit per share increasing to $1.53, though that was still down around 17% on last year’s figure.

Streaming Services

The big one as far as financial media commentary goes: Disney+ had 26.5m subscribers at the of 1Q20 (and the figure currently stands at circa 28.6m according to management). It only launched in November and hasn’t hit many overseas markets yet. Average monthly revenue per user for the service is running at $5.56 according to Disney, which is a $150m monthly revenue business already if my numbers are correct. ESPN+ and Hulu also reported growth, gaining around 13m subscribers over the course of calendar year 2019 on a combined basis.

Disney 1Q20 Streaming Service Subscribers

Disney hasn’t shied away from the fact that these three will be money burners until fiscal 2024 or so. (The segment lost just under $700m for Disney in 1Q20). If we assume Disney hits its subscriber targets, then Disney+, Hulu and ESPN+ will have around 135m subscribers between them by then (around 71.5m more than where it ended 1Q20 at). Needless to say that is a lot of potential revenue and profit to chase, and those subscriber targets could still prove to be conservative too.

Media Networks

The headline numbers for its linear-TV segment came in way higher as it included fresh 21CF assets such as FX and National Geographic. Disney reported total revenue of $7,361m from cable affiliate fees, advertising and distribution licensing last quarter, $1,630m of which flowed down to the operating income line. In the comparable period last year the revenue and operating income numbers came in at $5,921m and $1,330m respectively.

There are two things to look out for in this segment in my view. Firstly, ESPN continues its downward trend. It is losing subscribers, which obviously puts downward pressure on affiliate fee revenue. At the same time, it is negotiating increased affiliate fees for remaining subscribers to offset this. Last quarter that tug of war actually worked in Disney’s favor (i.e. total affiliate fee revenue went up despite losing subs), but it lost ad-revenue (fewer eyeballs) and had to pay more for programming rights such as NFL football. Second, and this will be a longer-term trend, how much will the rise of streaming services (including Disney’s own) eat into linear-TV profit?

Movie Studios & Parks

This is where Disney is killing it right now, particularly in terms of its movie studio numbers. I mean over the course of 2019 it racked up around $11,000m at the box office, smashing its own 2016 record by around $3,400m. The last time a company beat Disney at the box office was in 2015.

The company reported $3,800m in revenue last quarter, up around $2,000m year-on-year, as movies like Frozen II and Star Wars: The Rise of Skywalker hit theaters across the globe. Operating income was up $600m to just under $1,000m. This year will be weaker in terms of its numbers, though Disney is still releasing a couple of Pixar films and a live action remake of Mulan, among others (and 21CF films of course).

Disney 1Q20 Parks & Resorts Revenue Breakdown

The segment housing its theme parks continues to be ever reliable. Quarterly revenue increased 8% to $7,400m year-on-year, while operating profit was up 9% to $2,300m on the same basis. Total guest count was basically flat, while increased spending per head did the heavy lifting in terms of growth. Unfortunately, the impact of coronavirus is going to cost Disney circa $175m in operating profit this quarter as both Hong Kong Disneyland and Shanghai Disney Resort are now closed.

Valuation

Analysts expect Disney to make around $10,000m in net profit this year, which should work out to around $5.55 or so on a per-share basis. Assuming that proves accurate, we are currently looking at a valuation of circa 25x earnings based on a share price of $139 at time of publication. Now, the consensus view from financial media suggests that is quite expensive. Considering Disney stock was in the 15-20x range a lot during the second half of last decade I guess that makes sense.

Personally, I’m not so sure it is, though I concede there’s a risk the valuation multiple gets hacked back down. Despite the uncertainties presented by streaming and the decline of linear-TV, most folks think Disney will keep on growing. Analyst forecasts for 2021 have profit up past the $6 per share mark, circa 10% higher than 2020 profit estimates. The folks over at Morgan Stanley think Disney can double per-share profit between then and 2024. If that proves correct then you could easily be looking at $200-plus stock by then. Throw another $10 per share worth of cumulative dividend cash into the mix and we are still on for decent returns.

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