Walt Disney will grow alongside everyone else in the market

Disappointing third quarter accounts for Walt Disney, the first of its kind since the group won the challenge with Comcast to secure most of 21st Century Fox’s assets. However, CEO Bob Iger is optimistic and believes that the American entertainment giant “will grow alongside Netflix, Amazon and everyone else in the market”. 
And it will do so, thanks to its upcoming streaming service, which will be launched this year, and which has been described as “the company’s top priority”. The name remains top secret, but we know that new content and remakes, and all the house’s films will be released on the platform, aimed at families, and without passing through the competition.

Walt Disney holds the rights to some of the world’s best-known fantasy characters, from Mickey Mouse to Luke Skywalker, and is an industry leader in theme parks, including Disneyworld and Disneyland. The group also produces action and animation films in its Pixar, Marvel and Lucas Film studios, and also operates multimedia networks including ESPN and several television production studios. Disney has recently been reorganized into four divisions, with a new division being created. The new division includes the two OTT offerings, ESPN + and the Disney SVOD service. The plan also combines two existing divisions, parks and resorts and consumer products. The group of multimedia networks owns ABC and US cable channels. On the other hand, the Studios segment has film production resources.

In the third quarter of 2018, ending June 30, Disney reported a net profit of $2.9 billion, up 23% over the same period a year earlier. Net of extraordinary items, earnings per share grew 18% to $1.87, compared to analysts’ expectations of $1.95. Revenues rose year-on-year by 7% to $15.23 billion, below market forecasts of $15.34 billion.

In the same quarter of a year ago, Disney reported adjusted earnings per share of $1.58, and revenues of $14.24 billion.

Going into detail, thanks to the success of the films “Avengers: infinity war” (it exceeded $ 2 billion in the box office) and “The Incredibles 2”, the film division (Studio Entertainment) recorded operating profits of $ 708 million (+11% per year) and revenues of $ 2.88 billion (+20%), in line with estimates.

The division, which includes traditional and cable TV stations – including ESPN sports broadcaster and ABC generalist broadcaster – recorded $1.8 billion in operating income (-1% per annum), driven by the costs associated with the launch in April of the ESPN+ streaming service. Revenues amounted to 6,2 billion (+5%), above the 6,10 billion expected by analysts.

The theme parks and resorts generated a turnover of 5.2 billion, +6% per year, but under the consensus of 5.28 billion; the operating profits of 1.3 billion (+15%) were sustained by Shanghai Disney Resort and Hong Kong Disneyland Resort. “The turnout in America only increased by 1%, but the 5% increase in per capita spending was impressive, as was the 8% increase in room spending,” Morningstar analyst, Neil Macker, points out.

The consumer products and interactive media division saw sales fall 8% to $1 billion, $100 thousand less than expected, and operating profits fell 10% to $324 million. In this instance, they had less weight than products inspired by spider-man and cars.

Meanwhile, Disney has announced the suspension of the plan to repurchase its own securities, pending the completion of the acquisition of Fox’s assets: the shareholders of both groups and the U.S. Department of Justice have already given their approval to the $71.3 billion transaction (of which $35.7 billion is in cash), but the green light is still lacking from Chinese authorities and other countries.

Commenting on the accounts for the third quarter, Financial Director Christine McCarthy explained that buyback will not resume until the cash to debt ratio returns to levels that are in line with a rating of A. CEO Iger did not want to comment on the “fluid situation” of the ongoing challenge against Comcast to take control of Sky.

By acquiring Fox’s assets, Disney will take 39% of pay-TV, which is currently in the hands of Rupert Murdoch’s group (Fox has offered £14 per share for the rest of Sky, which it does not yet own, and could raise its stakes, given that Comcast has offered £14.75 per share).

Morningstar maintains its fair value estimate at $130, with a recommendation to buy at $91 and sell at $175.50. The share price is undervalued by 11%. Positive signals for Stock Invest, which expects further gains in the short term. In the Factset consensus of 25 analysts, 12 expressed a buy opinion, 12 a hold opinion, and 1 a sell opinion. The 12-month target price ranges from a high of 144 USD to a low of 93 USD.

After making the accounts public, Disney’s stock dropped half a percentage point to 115.98, losing 3% in the after-market. It has gained 8.42% since the start of the year, with 8.6% in the last 12 months.

Ticker: DIS
ISIN: US2546871060
Price as at 7/8/2018: 116.56 USD
Price as at 4/5/2018: 101.15 USD

According to Morningstar’s analysts:
Fair Value Estimate: 130 USD
Buy Consideration: 91 USD
Sell Consideration: 175.50 USD

According to Morningstar, the shares are now undervalued by 11%.

Stock Invest’s Valuation:
The Walt Disney Company has several positive signals, and is on a strong upward trend, so we believe it to be a good choice at this current level, and we expect further gains in the next 3 months.

Factset’s Consensus:
BUY: 12 out of 25 analysts
HOLD: 12 out of 25 analysts
SELL: 1 out of 25 analysts

12-month target price of between 93 USD and 144 USD

MarketWall editorial team