Disney Sees A Solid Growth Across Its Segments; Frozen Helps The Media Giant Post 23% Earnings Growth

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Walt Disney

Disney (NYSE:DIS) recently reported its earnings for Q1 fiscal 2015 with 9% revenue growth and a 23% jump in earnings to $1.27 per share. The earnings were primarily driven by a significant growth in the company’s consumer products segment. Theme parks benefited from higher attendance and guest spending, which boosted the company’s bottom line. Cable networks saw a 11% growth in the topline while the operating income grew only 3% as higher results at broadcasting were offset by higher programming costs at ESPN. [1] Overall, Disney once again posted good set of numbers with solid growth across the segments.

We estimate revenues of around $52 billion for Disney in 2015 and EPS of $4.59, which is in line with the market consensus of $4.46-$5.00, compiled by Thomson Reuters. We currently have a $93 price estimate for Disney’s shares, which we will soon update to incorporate the December quarter earnings.

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Frozen Merchandise Boosts The Consumer Products Segment

Disney’s consumer products division saw a 22% jump in revenues to $1.38 billion while the operating income surged 46% to $626 million in the December quarter. The segment growth was led by higher merchandise sales for Frozen. ((Disney’s SEC Filings)) The movie has been a stellar success for Disney and continues to aid the company’s topline and bottom line. The movie was released in November 2013 and it has grossed nearly $1.30 billion at global box-office. There was a massive demand for Frozen merchandise in 2014 and Disney was unable to meet that demand until the middle of the year. Frozen was also the No. 1 toy brand for 2014, according to market research firm NPD Group. [2] Given the popularity of Disney’s brands, we estimate the segment revenues will see steady growth in the coming years and be around $6 billion by the end of our forecast period. An estimated EBITDA margin of 43% will translate into EBITDA of over $2.50 billion, representing close to 10% of the company-wide EBITDA.

Higher Attendance And Guest Spending Boosts Theme Parks Operations

Theme parks continued to show steady growth in the U.S. Overall revenues for the December quarter were up 9% while the operating income jumped 20% to $805 million. This can be attributed to 6% volume growth and a 4% increase in guest spending at the U.S. parks. Looking at the international parks, volume was up 3% while average guest spending increased 5%. However, reported revenues were flat due to a 7% decrease from foreign currency translation. [3] The theme parks have been growing steadily for Disney over the past few years and we expect this trend to continue in the near term as well as in the long run, driven by continued growth in attendance and guest spending amid an economic recovery and the introduction of new rides that Disney brings into its parks. Disney will bring Star Wars to its theme parks and it is also developing Avatar Land in Florida. One of the biggest theme park projects for Disney is the Shanghai resort, which will be operational in 2016. These new attractions will boost the attendance at its theme parks and drive growth in the coming years. Our revenue forecast for calendar year 2015 currently stands at $16.64 billion while we expect the revenues to be northward of $27 billion by the end of our forecast period, driven by the benefits from the new attractions and the Shanghai resort. Looking at segment EBITDA, we estimate it to be around $4.90 billion in 2015, reflecting close to 30% of the company wide EBITDA.

Higher Programming Costs At ESPN Again Weigh Over The Media Networks Division

Media Networks saw an 11% revenue growth in the December quarter while the segment operating income was up only 3% to $1.50 billion. The revenue growth was driven by a 20% increase in affiliate fees due to higher contractual rates. The operating income was hurt by the higher programming costs at ESPN, driven by contractual rate increases for some of the sporting events including the NFL franchise. Looking at broadcasting, revenues were up 11% while the operating income grew 35% to $240 million, driven by higher affiliate revenues and program sales. [3] However, softer ratings led to a slight decline in advertising. We estimate the overall media networks revenues to be around $22.50 billion in 2015, reflecting growth of 5% over the prior year.

Studio Entertainment Sees A Muted Quarter

Revenues at the company’s studio division were down 2% to $1.86 billion while the operating income grew 33% to $544 million, reflecting the benefits from home entertainment and consumer products. While the studio business benefited from the success of Big Hero 6, it had a tough comparison with prior year quarter, which included the massive success of Thor and Frozen. Accordingly, theatrical revenues plunged 46% to $336 million in the December quarter. [3] However, Disney has a solid lineup for 2015 including, Cinderella, Avengers: Age of Ultron, Tomorrowland and Star Wars: The Force Awakens. These movies will drive the growth for the studio this year and we estimate the segment revenues will be over $7 billion. An estimated EBITDA margin of 22% will translate into EBITDA of over $1.5 billion by end of the year.

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Notes:
  1. The Walt Disney’s (DIS) CEO Bob Iger on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 3, 2015 []
  2. The NPD Group Reports on U.S. Toy Industry Retail Sales for 2014, NPD Group, Jan 20, 2015 []
  3. Disney’s SEC Filings [] [] []