Frozen Yet Again Boosts Disney’s Earnings Growth

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Walt Disney

Disney (NYSE:DIS) recently reported its earnings for Q2 fiscal 2015 with 7% revenue growth and a 11% jump in adjusted earnings to $1.23 per share. [1] The earnings were primarily driven by a significant growth in the company’s consumer products and theme parks segment. Theme parks benefited from higher attendance and guest spending, which boosted the company’s bottom line. Cable networks saw a 13% growth in the topline while the operating income was down 2% amid higher programming costs at ESPN. Frozen merchandise again boosted the bottom line for consumer products segment. Overall, Disney yet again posted good set of numbers with solid growth across the segments.

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 soon update to reflect the March quarter earnings announcement.

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Higher Attendance And Guest Spending Boosts Theme Parks Operations

Theme parks continued to show steady growth in the U.S. Overall revenues for the March quarter were up 6% while the operating income jumped 24% to $566 million. This can be attributed to 2% volume growth and a 7% increase in guest spending at the U.S. parks. The growth in domestic theme parks was led by higher ticket prices as well as room rates. However, international parks saw a revenue decline of 8% due to unfavorable foreign exchange. [1]

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 better macroeconomic environment and 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 $16.60 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 $5.10 billion in 2015, reflecting close to 30% of the company wide EBITDA.

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

Media Networks saw 11% revenue growth in the March quarter while the segment operating income was down 9% to $1.80 billion. The revenue growth was driven by higher affiliate fees and an 18% jump in ESPN ad revenues due to higher ratings in the March quarter. [2] It must be noted that ESPN was up 11% in average viewership for the March quarter. [3] However, as expected, the operating income was hurt by the higher programming costs at the sports network. The programming costs increased $465 million due to higher rights costs primarily for college football programming. Looking at broadcasting, revenues were up 19% while the operating income grew 90% to $302 million, driven by higher affiliate revenues and program sales. [1] We continue to believe that the media networks will see continued growth in affiliate fees in the near term while advertising revenues will largely depends on ratings. Ratings for many cable networks and broadcasting has been declining in the recent past amid a change in viewing habits and the rise of alternative video platforms. It will be interesting to see how the ratings trends for Disney’s networks in 2015. We currently estimate the overall media networks revenues to be around $22.50 billion and EBITDA of $8.50 billion in 2015, reflecting growth of less than 5% over the prior year.

Currency Headwinds Weigh Over Studio Operations

Revenues at the company’s studio division were down 6% to $1.68 billion and operating income was down 10% to $427 million due to unfavorable foreign currency translation impacts. Strength in the U.S. Dollar impacted the foreign collections in the March quarter. Moreover, it was a tough comparison with the prior year quarter, which included the massive success of Frozen. However, Disney has a solid lineup for 2015, including the recently released Avengers: Age of Ultron, which is off to a stellar start at the global box-office and Tomorrowland and Star Wars: The Force Awakens, slated for release later in the year. 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.

Also, Disney’s consumer products division saw a 10% jump in revenues to $971 million while the operating income surged 32% to $362 million in the March quarter. [1] The segment growth was led by higher merchandise sales for Frozen. The movie has been a stellar success for Disney and continues to aid the company’s topline and bottom line even after 70 weeks since its release.

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Notes:
  1. Disney’s SEC Filings [] [] [] []
  2. Walt Disney’s (DIS) CEO Bob Iger on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, May 5, 2015 []
  3. No Foolin’, ESPN and ESPN2 Both up Double Digits for First Quarter, ESPN Press Release, Apr 1, 2015 []