- Disney Operating Income growth is up 20% over the past 12 months.
- The market is pricing in reduced ad revenue from Disney's media networks.
- Studios and Parks income continues to go from strength to strength. Gains here will offset losses in ESPN ad revenue.
Walt Disney (NYSE:DIS) will announce earnings for its third quarter on the 9th of August where analysts will be looking for $1.61 in earnings per share and $14.17 billion in revenues. These numbers are 11% and 8% higher than the company's third quarter last year which should put things in perspective. Why? because in the same twelve months this stock has declined from its highs of $120+ per share. In fact, the stock is down 19% over the past year and the main reason has been its struggles with the ESPN side of its business. The market takes this side of the business very seriously because of the 30%+ operating income it contributes to the company.
However, in saying this, revenue and earnings continue to grow at the company despite its ESPN woes. Top line came in at $52.46 billion last year but this year sales are expected to top $56 billion. Furthermore, EPS came in at $4.90 last year but is expected to hit $5.81 this year. This leads me to the conclusion that sooner or later, this stock will stop trading based just on its ESPN earnings. There is just too much growth in its other areas for ESPN to continue affecting the stock price. Therefore, if we get another disappointing ESPN number in Q3 and the stock once again sells off in spite of hitting its estimates, I would be recommending my readers to start scaling into a long position. The company's fundamentals are just too strong. Here are areas to watch out for when it announces its next set of numbers.
EBITDA & Revenue Growth Have Accelerated Over The Past 12 Months
One of the main reasons why I like this stock at present is that it is re-accelerating growth rates in some strong fundamental metrics over the past 12 months. EBITDA growth, for example, re-accelerated to 18% over the past 12 months which was a 2.1% increase over its 5-year growth rate. Moreover, operating income growth reached 20.4% last quarter which was a 2.5% increase over its 5-year average. Finally, revenue growth has also expanded over the past 12 months - up by 2.2% over its 5-year average.
Watch the results to see if these growth rates can continue in its Q3 release. Currently, the stock has an earnings multiple of 17.7 which is still lower than its 5 year average of 19.3. Therefore if key fundamental growth metrics continue to go in the opposite direction to the company's valuation, I believe an attractive value play could be on the cards. The market may dismiss the company's fundamentals once again if ESPN earnings don't come up to scratch but astute investors won't.
Ad Revenue From Media Has The Market Cautious About Future Growth
The market seems to be pricing in a steady decline in Disney's ad revenue which was the case in the company's second quarter. Internet ad spending is projected to overtake TV advertising any year now which is why the market feels Disney's media networks side of the business will suffer (see chart). In saying this, media network sales were basically flat last quarter as affiliate fees and college football playoff games offset lower ad revenue. This is my point about company-wide sales continuing to increase despite lower ad revenue. Eventually, this price discounting will have to stop especially if we continue to have strong growth in parks and studios for example.
Studios Growth Will Continue Due To A Packed Pipeline Of Productions
Studios grew by a whopping 22% last quarter to reach $2.06B in revenue. Furthermore, you just have to look at what is coming down the track regarding its films to observe that revenue growth should improve meaningfully here. New franchises acquired in the past few years have really transformed this company which means Disney now distributes films through Walt Disney, Marvel, Pixar, Lucasfilm and Touchstone. Expect revenue growth to continue here. Films such as Pixar's "Finding Dory" really brought out families in droves and with another Star Wars film "Rogue One" to be launched in December, I can only see this division going from strength to strength. Star Wars recent release "The Force Awakens" is the third highest grossing movie in Hollywood so Disney's next installment should also be a runaway winner.
Theme Parks Will Thrive On The Back Of Successful Films
Furthermore, the company's parks and resorts segments should thrive on the back of a strong studios division. Asia is set for a boom in theme park openings and if Shanghai is anything to by, growth rates should thrive in this part of the world. About a million visitors have already visited Disney's Shanghai park and it isn't even a month old yet. What I like about the Chinese market for Disney is that the Chinese are avid film watchers. This is where it all starts. This segment reported top-line growth of 7% last year to $16.2 billion and 4% to almost $4 billion last quarter. It's a huge earner as it brought in well over 30% of sales in fiscal 2015. Growth rates are set to increase here.
To sum up, the market may penalize reducing ad revenue in Disney's media networks once more when it announces its fiscal Q3 earnings. However, the company is growing its top line strongly and in case of any selloff, in spite of continued strong growth rates in studios and parks, the stock is a strong buy.