VALUATION HIGHLIGHTS

1. Media and Entertainment Distribution (Linear Networks, Direct To Consumer, Content Sales, Licensing & Other) constitutes 69% of the Trefis price estimate for Disney's stock.
2. Parks, Experiences and Products (U.S. Theme Parks & Hotels, International Parks/Hotels, Consumer Products) constitute 31% of the Trefis price estimate for Disney's stock.

WHAT HAS CHANGED?

1. Disney's Q2 Fiscal 2022 Earnings

Disney reported a mixed set of Q2 FY'22 results. While revenue rose 23% year-over-year to $19.25 billion, adjusted EPS came in lower than expected at $ 1.08 per share, compared to $0.79 in the year-ago period. Revenue growth was driven primarily by a rebound in the company's theme parks and resorts business, which saw sales more than double as Covid-19 travel restrictions were eased. Moreover, the streaming operations also posted stronger than expected growth, with Disney+ ending the quarter with 137.7 million subscribers, up by 7.9 million since the end of 2021.

Note: Disney's FY'21 ended on October 2, 2021. Q2 FY'22 refers to the quarter that ended on April 2, 2022.

2. Successful Launch of Disney Plus

The Disney+ offering has seen solid growth since its launch in November 2019, garnering a total of over 84 million subscribers as of December 2021 (excluding Disney+ Hotstar). Disney has also demonstrated that it has good pricing power with the offering, as it raised monthly average revenues per user by close to 15% versus last year to about $6.70 as of December.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Disney is a well-diversified media company and a small change in a single business driver does not really hold much significance from a value standpoint. However, the drivers mentioned below are one of the most important and sensitive drivers for Disney's value.

• Media and Entertainment Distribution EBITDA Margins: We estimate this figure will increase from around 21% in FY'21 to over 35% by FY'28, as the streaming operations gradually turn profitable. That said, there could be a downside of about 10% to our price estimate if the margins were to rise only to about 30% over the same timeframe. On the other hand, if Disney manages to boost these margins to over 42%, it will result in an upside of about 10% to our price estimate for Disney.


• Per Capita Guest Spending at U.S. Theme Parks: We estimate this figure will increase from about $200 in fiscal 2021 to around $275 by the end of our forecast period. However, there could be a downside of a little under 10% to our price estimate if this spending were to remain rangebound around $200 levels. This could happen if other theme parks compete effectively, challenging Disney's domination, bringing down the guest spending.

For additional details, select a driver above or select a division from the interactive Trefis split for Disney at the top of the page.

BUSINESS SUMMARY

Disney is a diversified media company and makes money through several businesses including cable networks, broadcasting network, theme parks & hotels, filmed entertainment, and consumer products. The company has also added a direct-to-consumer business to its portfolio of late.

Its cable networks include channels such as ESPN, the Disney Channel, ABC Family, and others. Disney's broadcasting arm, ABC Network, is one of the biggest broadcasting networks in the U.S. with a wide viewership.

Apart from TV networks, Disney boasts of several theme parks and resorts that attract millions of visitors every year. Furthermore, the company leverages its famous characters and brands to sell a variety of merchandise. Its filmed entertainment unit produces and distributes movies under the Disney Studios brand.

SOURCES OF VALUE

We believe that Disney's media and entertainment distribution business, which includes its direct to consumer, linear, and content licensing operations, to be its most valuable divisions for the following reasons:

Direct To Consumer Business Growth

Disney's DTC business is growing quickly, driven by the popular Disney+ streaming offering. DTC Subscription Revenues grew to around $12 billion in FY'20 from around $8 billion in FY'19. We expect revenue to grow to over $30 billion by the end of our review period.

High Cable & Satellite Operator Fees

Cable and satellite companies such as Comcast and DirecTV pay Disney to include its cable channels, such as ESPN, Disney Channel, ABC Family, and others in their programming packages. These operators pay a handsome amount of fees for ESPN and for Disney Channel . The high amount of fee charged along with high ad pricing that results in healthy ad revenues make ESPN, and other cable networks, most valuable to Disney.

High Penetration Of Cable Networks

Along with the high fee charged, Disney's cable networks such as ESPN and Disney Channel have high penetration. ESPN and Disney Channel are present in approximately 95% of U.S. pay-TV households.

KEY TRENDS

Disney's pivot to streaming

Disney has doubled down on the streaming space with the launch of its Disney+ offering in late 2019. While competition in the streaming market is intense, Disney's deep library of legacy content and popular franchises such as Star Wars and Marvel could give it an edge over rivals. Disney is also investing heavily in content specific to its streaming businesses. For example, for FY'22, Disney expects content spending to rise to $33 billion, up from about $25 billion a year ago. Although the streaming business is loss-making currently, it could provide Disney with recurring profits in the future as it builds scale.

Increasing Pay TV Competition

Increasing competition among pay-TV providers, such as Comcast, Time Warner, DirecTV, AT&T, and Verizon is favorable for media companies including Disney, which can gain negotiating power in discussions regarding the pricing of subscription fees for their programming content.

Increasing Sports Programming Costs

ESPN increases its fee per subscriber every year, owing to a rise in sports programming costs which have become a cause of worry for pay-TV service providers. Some of them are considering dropping ESPN from lower-priced programming packages.

Declining DVDs And Expanding Streaming

As a result of the growth of rental companies and online video, DVD sales have suffered declines in recent years causing worry to media companies such as Disney. However, these media companies are now pushing for rental window and licensing of their older content to recoup lost profits.

Online Licensing & Broadcast Advertising

With the growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. However, given a decline in traditional television viewership, ratings are hit hard and this has resulted in lower advertising revenues for most of the media companies. So far, licensing revenue growth has not been able to completely offset the declines seen on the advertising front. Having said that, broadcasting networks, such as FOX, CBS, NBC, and ABC have been able to contain the advertising decline due to their exposure to sports programming, which garners very high viewership and better ad pricing.