When Disney (NYSE:DIS) reported its Q2 fiscal 2012 earnings last week, analysts seemed a little conservative with their earnings predictions due to a significant loss that the company incurred from the failure of its movie John Carter. Nevertheless, Disney was able to offset this loss with good performance from its media networks and parks & resorts businesses. Disney competes against other media giants such as Viacom (NASDAQ:VIA), Time Warner (NYSE:TWC) and News Corp (NASDAQ:NWS).
We estimate that Disney’s filmed entertainment arm constitutes about 20% of its value. The Q2 results for this segment were suppressed by the loss from the movie John Carter. However, the loss from a single movie is not indicative of a trend in filmed entertainment business and neither does such a loss bode too ill for Disney’s fundamental value (see The Significance Of John Carter’s Failure For Disney).
On the other hand, The Avengers has done quite the opposite. Breaking box office record of opening weekend in the U.S., the movie has already grossed over $1 billion in worldwide box office sales, which bodes well for Disney’s next quarter results. The movie business is not as stable as media networks business and can fluctuate a lot. As long as the company learns from its mistakes and capitalizes on famous franchise and characters, it should continue to do well.
Disney’s prime profit contributor ESPN continued to perform well in Q2 fiscal 2012. We estimate this channel contributes close to 1/3rd to Disney’s value. The profits were driven by an increase in affiliate revenue as well as advertising revenue. The ad market continues to remain healthy as evident from the earnings of other media companies. Further, ESPN is able to implement periodic price increases due to its unique stronghold over sports programming, thereby growing its affiliate revenue. Additionally, Disney Channel and ABC Family also performed well. These two networks contribute close to 10% to the company’s total value.
It bodes well for Disney that its primary dependence is on more stable media networks business. The quality of content, especially on ESPN and Disney Channel, remains good. This will help the company continue with the subscription price increases in the future and charge lucrative prices from advertisers.
Although the parks & resorts business did well in terms of profits, the actual cash flows still remain low due to high capital expenditures. Improving attendance and per capita spend, in tandem with newly finished investments in parks and resorts, will continue to lift this business.
Our current price estimate for Disney stands at $52.15, implying a premium of about 15% to the market price. We are in process of reviewing our price estimate in light of recent earnings.