Disney Earnings Increase 34% Year Over Year, But Is It A Buy?

| About: The Walt (DIS)

Walt Disney Co. (NYSE:DIS) is a diversified worldwide entertainment company which operates in five business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive. The company reported earnings after the market closed on 05Feb14 and on the surface everything looked great with the company reporting earnings of $1.04 per share (beating estimates by $0.13) on revenue of $12.31 billion (beating estimates by $80 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)

1FQ14

1FQ13

Y/Y

Media Networks

$ 5,290

$ 5,101

4%

Parks and Resorts

$ 3,597

$ 3,391

6%

Studio Entertainment

$ 1,893

$ 1,545

23%

Consumer Products

$ 1,126

$ 1,013

11%

Interactive

$ 403

$ 291

38%

Total

$ 12,309

$ 11,341

9%

Click to enlarge

Compared to last year total revenue has increased by 9%. Things of interest to me are the 23% increase in Studio Entertainment (which accounts for 15% of total revenues), 11% increase in Consumer Products (which accounts for 9% of total revenues) and the 38% increase in Interactive (which accounts for 3% of revenues). Studio Entertainment is the subsidiary engaged in creating movies and the 23% increase in revenue was primarily due to an increase in worldwide distribution results in large part to the movies Frozen and Thor. Consumer Products which is the subsidiary that engages in merchandising of the Disney brand and properties gained 11% aided by merchandise licensing due to the inclusion of Lucasfilm and higher revenues from the Planes, Disney Junior and Monsters University merchandise. The Interactive unit is the subsidiary which oversees various websites and interactive media gained 38% in revenues due to increase in the console games business mainly driven by Disney Infinity.

Income Statement

Income statement (millions)

1FQ14

1FQ13

Y/Y

Revenues

$ 12,309

$ 11,341

9%

Costs and expenses

$ (9,644)

$ (9,249)

4%

Restructuring and impairment charges

$ (19)

$ -

N/A

Other income, net

$ 6

$ (102)

106%

Interest Income

$ 49

$ (72)

168%

Equity in the income of investees

$ 239

$ 110

117%

Income before income taxes

$ 2,940

$ 2,028

45%

Income taxes

$ (1,036)

$ (590)

76%

Net income

$ 1,904

$ 1,438

32%

Less net income attributable to noncontrolling interests

$ (64)

$ (56)

-14%

Net income attributable to company

$ 1,840

$ 1,382

33%

Avg. diluted shares outstanding

1784

1800

-1%

Avg. basic shares outstanding

1762

1777

-1%

Earnings per diluted share

$ 1.03

$ 0.77

34%

Earnings per basic share

$ 1.04

$ 0.78

34%

Click to enlarge

Looking at the income statement at first glance is very appealing as you look at the bottom line and notice that earnings increased by 34% from last year; I'd like to parse the income statement to see why that was the case. The first thing I notice is the 106% increase in other income followed by the 168% increase in interest income. The increase in interest and investment income was due to gains on sales of investments. Equity in the income of investees increased 117% helping overall income before taxes increase 45% from the prior year. Income taxes increased 76% primarily to tax benefits realized in the prior year, making net income increase a whopping 32%. Income attributable to noncontrolling assets decreased 14% making total income attributable to the company increase an astounding 33% from last year and giving earnings per share a boost of 34%!

Balance Sheet

Balance Sheet (millions)

1FQ14

4FQ13

Y/Y

Cash and cash equivalents

$ 4,397

$ 3,931

12%

Receivables

$ 8,013

$ 6,967

15%

Inventories

$ 1,380

$ 1,487

-7%

Television costs and advances

$ 846

$ 634

33%

Deferred income taxes

$ 484

$ 485

0%

Other current taxes

$ 643

$ 605

6%

Total current assets

$ 15,763

$ 14,109

12%

Film and television costs

$ 4,992

$ 4,783

4%

Investments

$ 2,784

$ 2,849

-2%

Attractions, buildings and equipment

$ 41,498

$ 41,192

1%

Accumulated depreciation

$ (22,874)

$ (22,459)

2%

Projects in progress

$ 2,760

$ 2,476

11%

Land

$ 1,183

$ 1,171

1%

Intangible assets, net

$ 7,313

$ 7,370

-1%

Goodwill

$ 27,324

$ 27,324

0%

Other assets

$ 2,423

$ 2,426

0%

Total assets

$ 83,166

$ 81,241

2%

Accounts payable and other accrued liabilities

$ 8,590

$ 6,803

26%

Current portion of borrowings

$ 3,687

$ 1,512

144%

Unearned royalties and other advances

$ 3,419

$ 3,389

1%

Total current liabilities

$ 15,696

$ 11,704

34%

Borrowings

$ 11,714

$ 12,776

-8%

Deferred income taxes

$ 3,987

$ 4,050

-2%

Other long-term liabilities

$ 4,473

$ 4,561

-2%

Common Stock

$ 33,679

$ 33,440

1%

Retained earnings

$ 48,089

$ 47,758

1%

Accumulated other comprehensive loss

$ (1,144)

$ (1,187)

-4%

Treasury stock

$ (36,300)

$ (34,582)

5%

Noncontrolling interests

$ 2,972

$ 2,721

9%

Total equity

$ 47,296

$ 48,150

-2%

Total liabilities and equity

$ 83,166

$ 81,241

2%

Click to enlarge

On the current asset side of things, cash and cash equivalents increased 12% while receivables increased 15% and television costs and advances increased 33%. All three of these items helped contribute to the 12% increase in total current assets. Projects in progress increased 11% which helped total assets increase 2%. For the current liabilities side of the equation we see that accounts payable and other accrued liabilities increased 26% while current portion of borrowings increased 144% making total current liabilities increase 34%. Overall total equity decreased by 2% while total liabilities and equity increased by 2%.

Conclusion

The company reported earnings which were 34% higher than a year before on 9% more revenue while the share price was up 31.45% in the past year excluding dividends. The large increase in earnings was due primarily to the large increase in revenue. The share count was reduced by 1% but didn't drive earnings at all. I believe this to be an indication that management thinks the stock price may be a bit expensive at these levels. I love the quality of the earnings really because of the increase in revenue. On a fundamental basis, I believe this company is fairly valued with respect to 2014 earnings. The stock is up 3.4% in after hours trading the day of earnings in the face of an S&P500 which lost 0.2%. Although the company beat the analyst estimates, the earnings per share were much more than last year. Though in my last article on 24Dec13 I stated that I wasn't buying the stock, this is a name that I'm overly excited about now because of the quality of the earnings.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.