Disney: ESPN And Theme Parks Will Drive Q1 Fiscal 2015 Earnings

Disney (NYSE:DIS) will report its Q1 earnings for fiscal 2015 on February 3rd.  (Fiscal years end with September.)  We expect Disney to report higher earnings driven by strong growth at ESPN and its theme parks. While the studio business likely benefited from the success of Big Hero 6, it will have a tough comparison with prior year quarter, which included the massive success of Thor and Frozen.

Disney will surely benefit from higher ratings at the sports giant ESPN, which ended 2014 at the top spot in cable ratings. However, the important aspect to watch out for will be the network’s programming costs, which have been very high for some of the events including, Major League Baseball, NFL and College Football. Looking at theme parks, Disney started to reap the benefits of MyMagic+ technology since the previous quarter and it likely boosted the average guest spend at the theme parks in the December quarter as well.

We estimate revenues of around $49 billion for Disney in calendar year 2014 and EPS of $4.08. We maintain a $93 price estimate for Disney’s shares, which we will update after the December quarter earnings announcement.

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ESPN Likely To See Higher Advertising Revenues

We estimate that ESPN networks contribute roughly 35% to Disney’s value. The network has been riding high on ratings with its sports programming and this likely boosted its advertising income for the December quarter as well as the current quarter. For 2014, ESPN was up 3% in primetime among adults 18-49 and up 6% in total viewership. ^[1] ESPN in the current quarter is so far seeing even higher growth in ratings, courtesy of the college football playoffs. The inaugural playoff championship game this year was the highest rated cable television program of all time, with an 18.5 overnight rating, according to Nielsen. Given the high ratings, ESPN charged as much as $1 million for a 30 second ad spot in the playoff games. ^[2] Given the trends in ratings and ad pricing, ESPN is likely to see a solid growth in the near term. However, soaring programming costs remains a concern for ESPN. For instance, the network saw a 5% growth in advertising income in the previous quarter and the overall cable networks revenues were up 6%. However, high programming costs at ESPN led to a 1% decline in the operating income for entire cable network division. Even for the college playoffs, Disney’s deal with NCAA in 2012 was for $7 billion for 12 years.

Theme Parks Likely To Benefit From MyMagic+

Disney’s theme parks will continue to benefit from its MyMagic+ technology. MyMagic+ is a new ticketing system for Disney’s resorts and it can function as a room key, entry ticket to the parks and for payments to be made in the park for food, beverage and other services. Disney expects to boost the average guest spend inside the theme parks with this new technology. The benefits of this setup were visible in the previous quarter, which saw a 20% jump in theme parks operating income led by a 6% growth in guest spending and a 4% jump in attendance. ^[3] The company has been witnessing attendance growth in its theme parks for quite some time now. This can be primarily attributed to the improving U.S. economy and Disney’s investment in new attractions within its resorts. The U.S. personal disposable income has been on an uptrend over the past few years and has moved from a little over $11,500 billion in January 2011 to over $13,150 billion in November 2014. ^[4] The U.S. GDP has also seen strong momentum with 5% growth in the third quarter of 2014, the highest pace seen in past 11 years. ^[5] Growth in the economy should  give rise to increasing demand for luxuries including travel, leisure, theme parks, entertainment, etc. Moreover, Disney has been busy expanding the rides and developing new attractions within the existing theme parks. It is currently developing an Avatar based theme park at The Animal Kingdom resort and it will also bring Star Wars based attractions in its theme parks. These attractions will boost the attendance at the theme parks;  the continuous development of existing parks through new rides is also important to attracting repeat visitors.

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1. ESPN No. 1 in Cable Ratings for 2014, Variety, Jan 2, 2015 [↩]
2. It’s Official: ESPN Scored Cable’s Highest Ratings Ever With College Football Championship, Adweek, Jan 13, 2015 [↩]
3. Disney’s SEC Filings [↩]
4. United States Disposable Personal Income, Trading Economics [↩]
5. United States GDP Growth Rate, Trading Economics [↩]