Disney's Earnings Were Magical

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 |  About: The Walt Disney Company (DIS)
by: Abba's Aces

Summary

The company increased the top line by 10% and bottom line increased by 41% from last year.

Frozen and Thor continued to be power houses for the company on a global basis this quarter.

The stock is fairly valued and should be considered on market-wide pullbacks.

The last time I wrote about Walt Disney Co. (NYSE:DIS) I stated:

"Due to the bearish momentum, low dividend yield, and overall market volatility I will not be pulling the trigger on this name right now." Since that article was published the stock is up 4.54% while the S&P 500 (NYSEARCA:SPY) is up 1.88% and it's pretty safe to say that I missed out on a good move upwards. Disney 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 06May14 and on the surface the results were great with the company reporting earnings of $1.11 per share (beating estimates by $0.15) on revenue of $11.64 billion (beating estimates by $440 million). The stock increased 0.56% in after hours trading. 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)

2FQ14

1FQ14

2FQ13

Q/Q

Y/Y

Media Networks

$ 5,134

$ 5,290

$ 4,957

-3%

4%

Parks and Resorts

$ 3,562

$ 3,597

$ 3,302

-1%

8%

Studio Entertainment

$ 1,800

$ 1,893

$ 1,338

-5%

35%

Consumer Products

$ 885

$ 1,126

$ 763

-21%

16%

Interactive

$ 268

$ 403

$ 194

-33%

38%

Total

$ 11,649

$ 12,309

$ 10,554

-5%

10%

Click to enlarge

Immediately I see a 10% in top line results when compared to last year, but there is a 5% decline from last quarter's results. Studio Entertainment is the subsidiary engaged in creating movies and the 35% increase in revenue was primarily due to an increase in worldwide distribution results in large part to the movies Frozen and Thor and accounts for 15% of all revenues. Consumer Products which is the subsidiary that engages in merchandising of the Disney brand and properties gained 16% and accounted for 7.6% of revenues was aided by merchandise licensing due to the performance of Disney Channel, Mickey and Minnie and Planes merchandise and lower acquisition accounting impacts. The Interactive unit accounted for 2.3% of revenues and 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)

2FQ14

1FQ14

2FQ13

Q/Q

Y/Y

Revenues

$ 11,649

$ 12,309

$ 10,554

-5%

10%

Costs and expenses

$ (8,668)

$ (9,644)

$ (8,359)

-10%

4%

Restructuring and impairment charges

$ (48)

$ (19)

$ (61)

153%

-21%

Other income, net

$ (37)

$ 6

$ 10

-717%

-470%

Interest Income

$ 62

$ 49

$ (54)

27%

-215%

Equity in the income of investees

$ 217

$ 239

$ 185

-9%

17%

Income before income taxes

$ 3,175

$ 2,940

$ 2,275

8%

40%

Income taxes

$ (1,119)

$ (1,036)

$ (654)

8%

71%

Net income

$ 2,056

$ 1,904

$ 1,621

8%

27%

Less net income attributable to noncontrolling interests

$ (139)

$ (64)

$ (108)

117%

29%

Net income attributable to company

$ 1,917

$ 1,840

$ 1,513

4%

27%

Avg. diluted shares outstanding

1,770

1,784

1,825

-1%

-3%

Non-GAAP favorable tax adjustments related to pre-tax earnings of prior years

   

$ (0.06)

N/A

N/A

Non-GAAP restructuring and impairment charges

$ 0.02

   

N/A

N/A

Non-GAAP other income/(expense), net

$ 0.01

   

N/A

N/A

Earnings per diluted share

$ 1.11

$ 1.03

$ 0.79

8%

41%

Click to enlarge

So after seeing a 10% increase on the top line I'd like to see an exceptional increase to the bottom line and the company sure did deliver those exceptional results with a 41% increase in earnings from last year. First off, restructuring and impairment charges decreased by 21% but other income decreased 470%. Interest income decreased 215% but equity in the income of investees increased 17% and led to a gain in income before taxes of 40%! Obviously because revenues increased the company was going to get taxed more, and they actually increased 71% from last year leading net income to increase 27% from last year. Income from noncontrolling interests increased 29% but the net income attributable to the company remained at 27%. After taking into accounts some non-GAAP items and a 3% reduction in shares we received a 41% bump up in earnings when compared to last year.

Balance Sheet

Balance Sheet (millions)

2FQ14

1FQ14

Q/Q

Cash and cash equivalents

$ 4,078

$ 4,397

-7%

Receivables

$ 7,588

$ 8,013

-5%

Inventories

$ 1,343

$ 1,380

-3%

Television costs and advances

$ 937

$ 846

11%

Deferred income taxes

$ 478

$ 484

-1%

Other current taxes

$ 622

$ 643

-3%

Total current assets

$ 15,046

$ 15,763

-5%

Film and television costs

$ 5,067

$ 4,992

2%

Investments

$ 2,750

$ 2,784

-1%

Attractions, buildings and equipment

$ 41,759

$ 41,498

1%

Accumulated depreciation

$ (23,294)

$ (22,874)

2%

Projects in progress

$ 3,030

$ 2,760

10%

Land

$ 1,186

$ 1,183

0%

Intangible assets, net

$ 7,262

$ 7,313

-1%

Goodwill

$ 27,350

$ 27,324

0%

Other assets

$ 2,424

$ 2,423

0%

Total assets

$ 82,580

$ 83,166

-1%

Accounts payable and other accrued liabilities

$ 6,581

$ 8,590

-23%

Current portion of borrowings

$ 4,695

$ 3,687

27%

Unearned royalties and other advances

$ 3,886

$ 3,419

14%

Total current liabilities

$ 15,162

$ 15,696

-3%

Borrowings

$ 10,909

$ 11,714

-7%

Deferred income taxes

$ 4,228

$ 3,987

6%

Other long-term liabilities

$ 4,641

$ 4,473

4%

Total liabilities

$ 34,940

$ 35,870

-3%

Click to enlarge

The balance sheet didn't really move much from last quarter, but on the current assets side of the equation there was an 11% increase in television costs and advances but that didn't help as total current assets dropped 5%. On the long-term asset side there was a 10% increase in projects in progress but a total drop of 1% on the assets side of the balance sheet.

On the liability side of the equation there was a 23% drop in accounts payable and other accrued liabilities, a 27% increase in the current portion of borrowings, and a 14% increase in unearned royalties and other advances which brought a total decrease of 3% on the near-term portion of liabilities. Nothing really happened on the long-term liabilities but overall liabilities did decrease by 3%.

Conclusion

The company reported earnings which were 41% higher than a year ago on 10% more revenue while the share price was up 7.24% since the last earnings call. These were pretty good results to me and make me want to buy some more shares of the company. The company put together another stellar quarter with double-digit increases on the top and bottom lines. Frozen and Thor once again proved to be big money makers for the company as global box office money lifted the quarter. Through ad rates were higher this quarter, ESPN advertisement revenues were lower because of a decrease in ad units delivered. The results were good to me but we'll have to see what investors seemed to think when the market opens tomorrow. This stock may just be at the mercy of the overall market. That being said, I think the stock is fairly valued and should be accumulated on dips. With these results the stock is on my team and in the starting lineup.

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, SPY. 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.