A Closer Look At Disney’s Fiscal 2019

by Trefis Team
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Disney (NYSE: DIS) announced solid fiscal fourth quarter results on November 9, as both its earnings per share and revenues came in ahead of market expectations. The company’s revenue increased 12% year-over-year (y-o-y) to $14.3 billion and operating income grew 17% y-o-y to $3.3 billion. In addition, the company’s adjusted EPS rose 40% y-o-y while free cash flow fell marginally to $2.7 billion. The company’s results were driven by strong Studio Entertainment and Parks and Resorts performances.

The company will be officially calling its direct-to-consumer service Disney+, which is expected launch in the U.S. market late next year. The service will offer a rich array of original Disney, Pixar, Marvel, Star Wars and National Geographic content, along with unprecedented access to its library of film and television content, including all of its new theatrical releases starting with the 2019 slate.

Disney’s stock price grew more than 5% over the course of 2018, primarily due to the focus on the company’s new online streaming media service and the acquisition of assets from Fox. Our $120 price estimate for Disney’s stock is slightly ahead of the current market price. Our interactive dashboard What To Expect From Disney’s Q1 outlines our forecasts for the company’s fiscal Q1 and full-year results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation. We expect Disney to post flat revenue growth rate and a decline in EPS in Q1, driven by continued growth at Parks & Resorts, offset by increased expenses at Media Networks and a weaker film slate.

Media Networks Could Be A Drag In Q1

In Q1, results at ESPN were comparable to the prior-year quarter as affiliate revenue growth was offset by higher programming and production costs, driven by contractual rate increases, and lower advertising revenue. This trend is likely to continue into Q1 as well. Further, Disney also expects its Q1 cable programming expenses to be up 9%, driven by the timing shift of the college football semifinals. The continued ramp-up of ESPN+, which includes investments in sports rights, will have an adverse impact on operating income of about $100 million for the first quarter.

Expect Relatively Weak Studio Performance In Q1

Disney could face a challenging y-o-y comparison in the first quarter because of the phenomenal success of Star Wars: The Last Jedi, Thor: Ragnarok and Coco. Given the significant contributions films made to operating income in Q1 2018, operating income in this quarter could be down as much as $600 million. The theatrical success of Star Wars: The Last Jedi also resulted in higher licensing results for the first quarter last year, which in addition to the absence of a comparable franchise title this year will weigh on the segment’s licensing business in Q1 2019.

Parks And Resorts To Boost Results In Long Run

Disney continues to make enhancements to its parks with the recent opening of the new Toy Story Land at Shanghai Disneyland. The company also plans to open a new Star Wars Land in 2019 at both the Disneyland and Walt Disney World locations. Overall, we expect Disney’s theme parks to be an important driver for its long-term growth due to its international expansion. In fiscal 2018, the segment’s revenues grew 10% y-o-y and operating income increased 18% y-o-y.

Fiscal 2019 Outlook

Fiscal 2018 was the best year in Disney’s Studio history. Consequently, the company may face a difficult year-over-year comparison in the Studio Entertainment segment in fiscal 2019. However, it does have a strong upcoming lineup, including Ralph Breaks the Internet, Mary Poppins Returns, Captain Marvel, Dumbo, the next Avengers film, Aladdin, Toy Story 4 and The Lion King. In Media Networks, the company expects cable programming expenses to be up mid-single digits, driven primarily by contractual rate increases for sports rights at ESPN. It should be noted that Disney’s full-year fiscal 2019 results will be influenced by the timing of the closing of the Fox acquisition as well.

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