- Disney delivered another beat, in spite of falling ESPN subscriptions, but the market is still cautious.
- The Shanghai theme park has been a huge success and the momentum is likely to continue.
- Disney will continue to invest throughout all cycles. It earnings multiple of 17.8 at present provides a long term opportunity.
Walt Disney (NYSE:DIS) reported a top and bottom line beat in its third quarter earnings but the stock yet again failed to gain any traction in after hour trading. As mentioned in my earnings preview, this stock up to now has mainly traded off growth in its media networks, which only grew 2% in the third quarter. Media grew by 2% to reach $5.91 billion in the third quarter but even growth in the company's largest division wasn't enough to stop the stock from declining. However, investors need to put ESPN revenues in perspective with the growth Disney is enjoying in its other divisions and as a whole. Studio revenues rose by 40% to reach $2.85 billion and Parks were up 6% to reach $4.38 billion. Overall company revenue rose to $14.3 billion which was a 9% increase over its fiscal third quarter in 2015.
The drop in Disney's share price from its $120 a share levels in 2015 has meant that the company's earnings multiple has dropped to 17.8. This number is both below the company's five year average of 19.3 as well as the S&P500 average of 20.0. A falling share price combined with rising earnings, solid fundamentals plus revenue and cash flow growth is a recipe for a solid investment right here. Let's discuss why Disney should be part of your portfolio going forward.
Investment In Bamtech Gives Disney More Options In Media
The Bamtech investment will definitely help Disney monetize its media content as streaming options continue to change in this market. I see this as a hedge against cable sub churn and I think it's good that Disney has initially gone in with a 33% stake. The company has obviously done its homework here and sees the Bamtech acquisition as a calculated risk. Disney CEO Bob Iger stated on the earnings call that streaming live events at scale was necessary going forward. ESPN should get a nice uplift from Bamtech offerings due to the bigger selection that will be available to sports fans.
However, the real reason for the investment here is to position the company correctly in case the current business model declines meaningfully. This deal gives Disney more options as the company could easily provide ESPN as a full DTC offering if subscription numbers decline. The market seems to have taken the Bamtech investment as a negative but it definitely gives the company more options, which is what it needs in media going forward.
Parks Income Continues To Climb Despite Political Turmoil
The parks and resorts segment surprised many with its 6% growth rate but once again the company's diversified business model came to the fore. The American theme parks did surprisingly well considering the mass shootings and the alligator accident. Terrorist attacks in France and the recent Brexit event definitely affected sales at Euro-Disney Paris but softness here was offset by huge momentum in its Shanghai park. It's the diversification and long term view the company takes that interests investors here.
For example, Disney is building two Star Wars lands in Orlando and California along with an avatar land due to open next year. Remember growth in its parks has been achieved with current perceived weakness in the US, obvious weakness in Europe and Shanghai not even being 2 months old yet. With the studio entertainment business growing so strongly, Disney's theme parks will continue to see growth. Furthermore the Chinese are avid film watchers which is why it is no surprise to see them staying much longer Shanghai's new theme park. This trend will continue in my opinion.
Investors Should Focus On the Long Term
The long term story is what investors should takeaway from the company's fiscal third quarter earnings. Disney is a stock that, due to the timing of its long term investments, may not report stellar growth every quarter. For example, in its studio business which performed excellently in Q3, Captain America & Finding Dory were the main reasons for the spike in growth. Furthermore Disney's pipeline looks strong with "Rogue One", the Star Wars offshoot scheduled to be released in December. Successful films will limit the impact of secular headwinds in the media space as studio is the company's fastest growing segment by far. I just fail to see ESPN declining to the extent that many analysts are predicting. Recent growth rates in parks and studios are strong. I see these trends continuing along with media at least stabilizing from these levels.
To sum up, Disney is having trouble with its paid subscriptions in its media networks but parks and studio segment income is more than compensating. Furthermore, the company's move to acquire Bamtech will give it more options in media and should steady the ship. Furthermore, its strong balance sheet and low pay-out ratio should eventually attract value investors in droves. Long term investors should be looking to scale into Disney below $100 a share.