- The studio success of Frozen continues to trickle down to all other business units.
- Growth for 2016 and beyond seems secured through the Shanghai Park opening.
- Buy this extremely well-run high quality company on the dips.
The Walt Disney Company (NYSE:DIS) continues to show excellent momentum driven by double-digit revenue and earnings growth at the moment.
The company continues to show impressive results across all of its business units in anticipation of even more growth in the near future with the Shanghai opening planned within the next 18 months.
Second Quarter Headlines
Disney reported second quarter revenues of $11.65 billion, up 10% compared to a year earlier. Even more important for investors, earnings were up by 27% to $1.92 billion.
A modest pace of share repurchases resulted in 30% earnings per share growth towards $1.08 per share. Earnings were impacted by a net charge of $0.03 per share driven by various positive and negative items. This included a $143 million charge related to the devaluation of the Venezuelan currency, among others.
Media And Parks Remain Cash Cows
Revenues at media networks were up by 4% to $5.13 billion marking both the biggest and slowest growing business unit of the company. Cable networking revenues rose by 5% to $3.63 billion driven by success of ESPN and domestic Disney channels. Operating earnings of the unit rose by 15% to $1.97 billion, for incredible operating margins of 54.2%.
Broadcasting revenues have been flat at $1.50 billion, while operating earnings improved by 15% to $159 million on stricter cost control.
Revenues at the parks and resorts business were up by 8% to $3.56 billion while profitability rose by 19% to $457 million despite an unfavorable shift of the Easter holiday weekend. Strong spending and attendance both domestically and in Hong Kong offset continued weakness in the Paris park.
Recently, Disney announced the acceleration of its expansion in Shanghai at a cost of roughly $0.8 billion. While this has been driven by cost inflation, it also raises the hopes for the performance of the park. The park, which is expected to open late in 2015, could be huge with 330 million potential guests living within a three-hour travel trip of the park.
Studio, Consumer Products And Interactive Drive Growth
Studio entertainment revenues rose by 35% to $1.80 billion with very strong operating leverage resulting in operating earnings increasing from $118 to $475 million. Of course, the huge success of Frozen and Thor to a lesser extent are the main drivers behind the growth.
Consumer sales were very healthy as well with revenues up 16% to $885 million. Operating earnings rose to a very impressive $274 million driven by Frozen, the Disney Channel, Mickey and Minnie, among others.
The interactive business managed to report a small profit of $14 million thanks to sales of 3 million Disney Infinity games. Revenues were up strongly as well, increasing by 38% to $268 million.
Disney ended the quarter with $4.1 billion in cash and equivalents, while holding a net debt position of roughly $11.5 billion. Given the strong free cash flow characteristics of the business with relatively few capital investment requirements, this should be no problem.
At the current pace, Disney could report revenues of about $50 billion and earnings, which approach $8 billion. At $81 per share, Disney's equity is valued at $142 billion, the equivalent of 2.8 times annual revenues and 17-18 times annual earnings.
The company repurchased shares at a rate of about 3% per annum over the past year while the annual dividend of $0.86 provides investors with a yield of another 1.1%.
Capital Light And Synergistic Business Model
Disney's business model is hugely attractive for two main reasons. For starters, Disney has to make very few capital expenditures. Its $1.4 billion capital expenditures budget for the first half of this year is focused on parks and resorts, notably the Shanghai Disney Resort. Excluding the construction of this theme park, capital expenditures would be just a few hundred million.
In the meantime, studio titles continue to perform extremely well. Frozen which was released in November of last year has already grossed $1.18 billion. Captain America, which was released as recent as April 4 grossed $682 million.
These successes create short-term profits for the studios but long lasting and even more profitable cash flows through increased park attendance, the Disney Channel and merchandise. To illustrate the success of the trickle-down strategy, on the conference call CFO Jay Rasulo admitted that 9 out of the 10 best selling items in its stores were Frozen merchandise.
Implications For Investors
Disney continues to show real momentum, which is unlikely to slow down in a serious way ahead of the Shanghai park opening. The impact of the opening could be huge on future earnings growth while Bob Iger continues to run the company in a very good manner.
That being said, a lot of good news has been priced in already with shares doubling from $40 at the start of 2012 in a rather linear move. While shares still hold some appeal based on the quality and growth of earnings, I would be more comfortable being able to buy shares on a significant dip around $70-$75 per share.