Disney’s Growth in Cable & Online Supports $46 Value

by Trefis Team
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Disney
Source: Google Finance

Source: Google Finance

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Disney (NYSE:DIS) has demonstrated its strength despite economic headwinds, and it made some strides in extending partnerships with online distribution platforms. Disney’s stock jumped after the company reported earnings last week as a result of increased profits. While this was in part driven by improvement at theme parts, a significant portion came from its TV networks which continue to remain the main pillar of Disney’s growth. To strengthen its TV earnings, the company has signed deals with Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Google’s (NASDAQ:GOOG) Youtube.

See our full analysis for Disney

Our price estimate for Disney stands at $46, implying a premium of more than 30% to the market price

Impressive Earnings Results, Where Does the Future Lie?

Disney released its quarterly results last week, and its profits increased significantly compared to a year ago as a result of strength in its TV networks and improved profits from theme parks. The company primarily relies on its TV business with ESPN contributing a significant chunk. Although the results this past quarter were good, we look at the trajectory of growth of its TV networks, especially for cable.

The company has posted growth for this segment for the last 3 quarters. [1] It is hard to determine a sustainable trend from data that spans such a short period, but one thing is clear, if Disney needs to continue its growth it must pay special importance to sustainability of growth of its cable networks. One of the ways to do this is look to emerging markets and the company has already struck a deal to launch Disney Channel in Russia.

Additionally, the company thinks that emerging markets also provide growth opportunities for its theme parks business. This is true given the improvement in per capita income and rising middle class. However the cash profits from theme parks are very low after accounting for huge capital expenditures that need to be put in. Disney should probably first make efforts to expand penetration of its cable networks in emerging markets.

Online Partnerships

Like other media companies, Disney is also taking advantage of online distribution platforms. It recently signed a deal with Netflix under which the TV shows from Disney’s ABC will be available on Netflix 30 days after the last show of the season has aired on TV. [2] The company also signed a deal with Amazon to add past seasons of some of its shows such as Grey’s Anatomy, Lost and others to Amazon Prime’s streaming catalog. [2] In yet another deal, Disney is looking to leverage Youtube’s online video platform distribute some small original videos in order to better reach out young audience. [3]

These partnerships will help Disney get additional revenue for its content which will directly add to its profits, and align itself more with the consumer shift. Ultimately, Disney wants as many people as possible to watch its shows as many number of hours as possible. This objective can not be attained without tapping into online world.

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Notes:
  1. Disney Needs TV to Keep Its Magic, The Wall Street Journal, Nov 12 2011 []
  2. ABC Strikes New Deals with Netflix, Amazon, Aol TV, Oct 31 2011 [] []
  3. Disney and Youtube Make a Video Deal, The New York Times, Nov 6 2011 []
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