Disney: More Of The Same

| About: The Walt (DIS)

Summary

Finding Dory set box office records.

The Studio segment is becoming more important to Disney being able to meet or beat earnings estimates.

Disney is a great long-term buy at today's price.

The Walt Disney Company (NYSE:DIS)'s latest animated film "Finding Dory" set box office records over the weekend and this is just the latest example of how management is positioning the Studio Entertainment segment to be a major contributor to the company's long-term growth prospects.

Many analysts are solely focused on the ESPN numbers and the related unbundling concerns, but, in my opinion, this narrow focus is causing many investors to miss the fact that DIS's other segments are firing on all cylinders, especially the Studio Entertainment segment.

The Studio Segment, Pixar Is Only A Piece Of The Puzzle

The early success for Finding Dory is impressive, but what is even more impressive is the fact that the movie is a follow up to Finding Nemo that was released in 2003. The takeaway is that Disney is able to release a movie 13 years after the original film first hit the market and beat box office records by a wide margin. What's not to like about this? Simply put, Disney's IP is amazing.

The story does not end there, as the Pixar lineup through 2019 is very encouraging from a long-term investor's perspective.

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(Source)

The two upcoming films that will likely outperform future expectations are Cars 3 and Toy Story 4, but all of the films should perform well at the box office. Therefore, investors should expect for Pixar to be a major contributor to the Studio segment's operating results over the next two-to-three years.

It is also important to remember that Pixar is only one component of the Studio segment, and that the other components of the segment have also been able to release hit and hit over the past few years. The future for the Studio segment appears extremely bright when taking into consideration all of the pieces of the puzzle (i.e. Lucasfilm, Marvel, Pixar, etc.)

Looking ahead, the late 2016/2017 films should perform well with the most notable movie being the next Star Wars.

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(Source)

The Studio Segment, By The Numbers

In "Disney: The 'Other' Segments, By The Numbers", I took a deep dive into the operating results over the last three years in an attempt to show the SA community just how significant of a contributor the Studio segment is becoming to Disney's consolidated results.

Within the previous article, I created the two tables below and provided a few observations for the consolidated numbers but in this article I want to focus strictly on the Studio segment.

This first table is the trending of the company's revenues and operating income, by segment, for the first quarter of the last three fiscal years. (Full disclosure: First-quarter data was selected because it was the most recent quarter reported by the company.)

Revenues 1/2/16 Chg 12/27/14 Chg. 12/28/13
Media Networks $6,332 8% $5,860 11% $5,290
Parks and Resorts 4,281 9% 3,910 9% 3,597
Studio Entertainment 2,721 46% 1,858 -2% 1,893
Consumer Products & Interactive Media 1,910 8% 1,763 15% 1,529
$15,244 14% $13,391 9% $12,309
Segment operating income
Media Networks $1,412 -6% $1,495 3% $1,455
Parks and Resorts 981 22% 805 20% 671
Studio Entertainment 1,014 86% 544 33% 409
Consumer Products & Interactive Media 860 23% 701 45% 485
$4,267 20% $3,545 17% $3,020
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(Source: Q1'16 10-Q and Q1'15 10-Q)

This next table was created with the data above, and it shows the percentage of total revenue and operating income for each of the operating segments.

% of total revenue 1/2/16 12/27/14 12/28/13
Media Networks 42% 44% 43%
Parks and Resorts 28% 29% 29%
Studio Entertainment 18% 14% 15%
Consumer Products & Interactive Media 13% 13% 12%
% of total segment OI
Media Networks 33% 42% 48%
Parks and Resorts 23% 23% 22%
Studio Entertainment 24% 15% 14%
Consumer Products & Interactive Media 20% 20% 16%
Click to enlarge

Observations from the tables:

  • The Studio segment's first quarter of 2016 revenue and operating income were up an astonishing 46% and 86%, respectively.
  • The Studio segment now accounts for almost 20% of total revenue and 24% of total operating income, which is up from 14% and 15% in the prior year.

Studio is quickly becoming a more-significant operating segment and the positive momentum should continue over the next two-to-three years, if not longer. The Star Wars movie contributed to the stellar Q1 2016 performance for the segment, but the upcoming movies have the potential to add to this already outstanding top and bottom-line growth.

The operating income for Studio accounts for approximately 1/4 of Disney's total operating income and this is significantly up from a year ago, but the Media segment, or should I say ESPN, still counts for 1/3 of Disney's total operating income. However, the Studio segment has the potential to more than make-up for the revenue/income that investors are anticipating for the Media segment to lose from the unbundling trend --i.e. the concerns are overblown.

Bottom Line

Disney is a core holding in the R.I.P. portfolio, and it is a position that I would like to add to if the opportunity presents itself (I have been saying this for awhile now). Disney has released numerous movies over the past 12 months that have exceeded expectations and the upcoming movies are likely to be more of the same. The long-term investors that are trying to find a great media company should look no further than Disney, because this company has multiple segments that are firing on all cylinders and the upcoming movie lineup is a catalyst that will help propel the share price higher.

Disney recently signed a media deal with the Big 10 for an average spend of $190m per year, which is another example of the company being fully committed to live sports. Similar to previous comments that I have made on SA, I have full faith in Mr. Iger and company to utilize Disney's media assets to eventually capitalize on the unbundling trend, that is if the trend continues. At the end of the day, Disney is a great long-term buy at today's price, so investors should treat any significant dips as buying opportunities.

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Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are 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.