- Disney beat on both the top and bottom line with EPS up 41% year over year thanks to strength across the board.
- ESPN continues to deliver strong results, and ABC showed stabilization thanks to diligent cost control.
- Disney's parks performed well thanks to strong attendance and higher prices.
- Frozen propelled fantastic studio results, and franchise tentpoles will make 2015 a record year that will help push merchandise and park revenue higher as well.
- With a strong franchise strategy, Disney is a solid long term pick for your portfolio despite its lofty valuation.
After the bell on Tuesday, the Walt Disney Company (NYSE:DIS) reported yet another stellar quarter, and shares were trading marginally higher. While the valuation is definitely rich, Disney remains the perfect candidate to be a buy and hold stock in your portfolio, and investors should add to their position on dips. CEO Bob Iger has proven to be both a fantastic manager and a visionary with transformative acquisitions like Marvel that have added substantial value to Disney. Disney's studio is once again a juggernaut, and its strong franchises give the business unprecedented strength and stability. Disney is a company that you cannot bet against.
In the quarter, Disney earned $1.11 on revenue of $11.65 billion while analysts were looking for $0.96 on $11.25 billion (all financial and operating data available here). Revenue was up 10%, and EPS was up a whopping 41% compared to last year thanks to a 34% increase in operating income. It would be fair to call this a blow-out quarter. Strong film results pushed operating cash flow 17% higher to $2.5 billion and free cash flow up 15% to $1.826 billion. Disney is operating on all cylinders and delivering tremendous growth for shareholders. With the next phase of the Marvel universe being built and a new Star Wars movie in the pipeline, growth should remain strong in 2015. In some ways, 2014 was seen as a transition year before what will be a record 2015, but 2014 is proving to be a pretty good year.
Media networks remains the comparative laggard as revenue only grew 4% to $5.1 billion, and operating income jumped 15% to $2.1 billion. For the past three years, cable has powered this group to higher results as ESPN is a ratings behemoth that generates significant ad revenue and high transmission fees. We saw continued strength from cable networks with revenue up 5% and income up 15% to $1.97 billion. ESPN continues to draw viewers despite increasing competition from other sports networks. ABC has been problematic as it struggles to grow ratings, but this quarter was better than I expected. It kept revenue flat, and operating income was 15% higher. Going forward, I expect stabilization at ABC, and it will need to develop more high-rating shows like SHEILD to contribute growth while ESPN will keep delivering growth for the cable unit.
Disney has also been raising prices at its parks, which is fantastic for margins. Thanks to the strength of the brand, higher prices haven't kept consumers from coming with attendance continuing to grow. Park revenue was up 8%, and operating income was up 19% to $457 million. The Avengers are extremely popular in China, and Disney expanded its park presence into China at just the right time as these characters will help drive attendance. The parks have been aided by a reinvigorated brand that has added Marvel, Lucasfilm, and Frozen to an already beloved cast of characters. With higher prices and a great brand, Disney Parks should continue to generate higher operating income over the course of the year.
Finally, this was a fantastic quarter from the film studio. This division is not Disney's largest as it has $1.8 billion in revenue (up 35% year over year). However, it is probably the most important. The film studio builds characters and franchises that Disney uses to sell merchandise, make its parks more enticing, and create programming for TV. In a sense, the film studio has a halo effect, and its strength leads to strength elsewhere in the company in the ensuing quarters and even years. Profits more than doubled to $475 million in the quarter thanks to Frozen. Captain America 2 should power strong results in this quarter. By now, you probably know that Frozen has become a global phenomenon. It earned $400 million in the US and $1.17 billion globally (all box office data can be found here). It is still performing well in Japan; in fact, this past weekend, its 8th in that market, was its strongest yet. The strength of Frozen shows Disney can release commercially and critically acclaimed movies outside of the Pixar brand.
Captain America 2 has also been a fantastic performer. So far, it has earned $238 million, and it will pass $250 million by the end of its run. Globally, it is at $680 million, and $725-$750 million is a likely ending point. This film is up significantly from its predecessor thanks to the strength of The Avengers. Impressively, it has outperformed Thor 2 even though the first Thor outperformed the first Captain America. Thus far in 2014, Disney is the leading studio at the box office with $530 million in gross revenue. In the rest of the year, we have original fare like Maleficent and franchise fare like The Guardians of the Galaxy, which could further expand the Marvel universe.
While 2014 has been a surprisingly strong year, 2015 is all but guaranteed to be a record year. It will be releasing 2 Pixar movies, compared to zero this year. 2015 also boasts The Avengers 2 and Star Wars 7. These films are likely to be the two top films of the year and could each near $1.8-2 billion worldwide. These tentpoles give Disney an incredible film slate that will provide substantial growth. Importantly, they are part of large universes that allow for several films based on different characters. Disney has minimized the risk of film-making by building exceptionally popular films that are guaranteed to draw substantial audiences and also provide substantial revenue from merchandise, toys, and park attractions.
Therefore, Disney is performing extremely well with all of its divisions delivering some growth. 2015 is poised to be an even better year thanks to an incredible film slate and the company's strategy of developing large franchises that can provide stable results. Disney should earn at least $4.10 this year, and a 20x multiple makes sense given its growth. After all, Disney should be able to earn north of $5.00 in 2015. With this growth, an elevated multiple does seem merited. At $80-$82, shares are around a fair valuation. For investors with a longer time frame, owning Disney is a wise decision. I would use any pullback to the $75 area to add to a Disney long. With a multi-year franchise strategy in place, Disney should deliver growth for several years, which will power shares higher. Disney continues to be a great long term buy and a hold stock.