Disney’s Q2 2015 Earnings Preview: Watchout For Currency Headwinds

Disney (NYSE:DIS) will report its Q2 earnings for fiscal 2015 on May 5th.  (The fiscal year ends with September.)  While we expect Disney to post continued growth at ESPN and its theme parks, currency headwinds may weigh on the company’s operations in the March quarter. While the studio business likely benefited from the success of Cinderella, it may have a tough comparison with prior year quarter, which included Frozen.

Disney will surely benefit from higher ratings at the sports giant ESPN, which was up 11% in average viewership for the March quarter. ^[1] However, the important aspect to watch out for will be the network’s programming costs, which have been very high for some of the sports events. Looking at theme parks, Disney should see some benefits from increased ticket prices in the March quarter.

We currently forecast revenues of around $53 billion for Disney in 2015 and EPS of $4.90, which is in line with the market consensus of $4.89, compiled by Thomson Reuters. We currently have a $105 price estimate for Disney’s shares, which we will update after the March quarter earnings announcement.

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Expect Continued Growth At ESPN

We estimate that ESPN contributes roughly 30% 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 March quarter. For Q1 2015, ESPN networks saw a 9% uptick in average viewership, courtesy the college football playoffs. ^[1] This will likely aid advertising income for the media network. However, soaring programming costs remains a concern for ESPN. For instance, the media networks saw an 11% revenue growth in the previous quarter but operating income was up only 3% due to higher programming costs at ESPN, driven by contractual rate increases for some sporting events, including the NFL franchise. ^[2] We are eager to learn how the costs trend in the March quarter.

Theme Parks Likely To Benefit From Higher Ticket Prices

Disney’s theme parks will see some benefits from increased ticket prices. 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. U.S. disposable personal 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 $13,266 billion in January 2015. ^[3] A better macroeconomic environment should spur demand for luxuries including travel, leisure, theme parks, entertainment, etc.  Moreover, Disney has been busy expanding rides and developing new attractions within the existing theme parks. It is currently developing an Avatar based attraction at The Animal Kingdom resort and will also bring Star Wars based attractions to its theme parks. These attractions should boost attendance and  the continuous development of existing parks with new rides should help attract repeat visitors in the coming years.

Studio Entertainment Will Benefit From Cinderella But Currency Headwinds And Tough Comparison May Drag Bottom Line

Disney will surely benefit from the wide success of Cinderella, which has grossed close to $500 million at the global box-office while it was made with a production budget of $95 million. ^[4] However, it will be a tough comparison with the prior year quarter, which included the massive success of Frozen. Moreover, given the strength in U.S. Dollar, it will weigh over the foreign collections in the March quarter. However, Disney has a solid lineup for 2015, including the recently released Avengers: Age of Ultron and slated for release in coming months, Tomorrowland and Star Wars: The Force Awakens. These movies should drive growth for the studio this year, and we estimate the segment revenues to be over $7.50 billion. An estimated EBITDA margin of 28% will translate into EBITDA of over $2 billion by end of the year, representing more than 10% of the company wide EBITDA.

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1. No Foolin’, ESPN and ESPN2 Both up Double Digits for First Quarter, ESPN Press Release, Apr 1, 2015 [↩] [↩]
2. Disney’s SEC Filings [↩]
3. United States Disposable Personal Income, Trading Economics [↩]
4. Cinderella, Box Office Mojo, As of May 3. 2015 [↩]