On August 4, media giant and consumer spending bellwether Walt Disney (DIS) put up decent fiscal third-quarter results, but concerns about the future of pay-TV left investors a bit cautious on its outlook. We don’t expect a material change to our $94 per share fair value estimate of the company (we have been far below the market price of $120+), and we point to most of the sell off as profit-taking following a very strong multi-year share-price run.
During the fiscal third-quarter (ended June 27, 2015), revenue leapt to $13.1 billion from $12.5 billion in the year-ago period (a 5% increase), while diluted earnings per share advanced at a nice 13% clip, to $1.45 per share. On display yet again in the quarter was “the power of (Disney’s) unparalleled brands, franchises and creative content.” Very few companies have the swagger of the Disney brand empire, and we don’t expect this to change anytime soon. The pace of top and bottom-line expansion in the quarter, however, came in below the pace of the first nine months of the year (+7% and +16%, respectively), but not by much.
The company’s Studio Entertainment division was the standout in terms of top-line expansion in the quarter (+13%), while segment income growth was led by strength in its ‘Consumer Products’ segment (+27%). Strong performance from Marvel’s Avenges Age of Ultron and Cinderella helped its studio segment, while Frozen, The Avengers, and Star Wars merchandise continue to fly off of shelves, aiding consumer products sales. Revenue in Disney’s widely-followed ‘Parks & Resorts’ segment advanced 4% in the quarter, while segment operating income in the division advanced 9%, though the pace was lower than the nine-month trend (+6% and +16%, respectively). Operating cash flow and free cash flow generation were strong at $2.8 billion and $1.65 billion in the quarter, respectively, but both came in below levels of the same period last year.
It’s easy to see why investors viewed the report as a disappointment. But CEO Bob Iger threw more cold water on the performance as he talked down the performance of ESPN in reiterating subscriber losses that the company has endured. Iger pointed to a decline in multi-channel households, but cord-cutting and bundling concerns haven’t gone away. Technology and trends in younger audiences are impacting the entire media landscape, and many investors were caught a bit off-guard. CBS (CBS), Comcast (CMCSA), Discovery (DISCA) Twenty-First Century Fox (FOXA), Viacom (VIAB), Time Warner (TWX), and AMC Networks (AMCX) have not been spared selling pressure either, as worries that per-subscriber affiliate fees may not live up to previous expectations mount.
The media environment remains as dynamic as any time in its evolving history. Competition for eyeballs is coming from everywhere, and not only from social media. The strength of Netflix (NFLX), Hulu, Amazon (AMZN) and Google’s (GOOG) YouTube are areas of rivalry that cannot be ignored, and the “lost years” that left many millennials looking for jobs during the Financial Crisis means many won’t be willing to pay subscriber fees…at all. That’s a big problem for traditional pay-TV providers. We continue to believe our below-market valuation of Disney was spot-on, and while shares are facing pressure, they continue to converge to our estimate of the media giant’s intrinsic worth.