Disney Keeps Rolling

| About: The Walt (DIS)

Entertainment giant Disney (NYSE:DIS) announced solid fiscal first quarter results Tuesday after the market closed. Revenues jumped 5% year-over-year to $11.3 billion, exceeding consensus estimates. Earnings fell 4% year-over-year to $0.77 per share, higher than consensus predictions.

Disney's results were solid, but we thought the most important takeaway came from CEO Bob Iger during an interview with CNBC. Iger confirmed that the firm will be making Star Wars movies that deviate from the story's sequence of events. We believe this implies movies driven around certain characters and their respective origins or backstories. This is essentially what the company successfully accomplished with The Avengers, and we think the results could be even better, given the immense popularity of Star Wars (as well as the franchise's incredibly well-developed extended universe). Additional films weren't factored into the initial deal, so we think these movies will make the acquisition look like a great bargain for Disney. Star Wars has been under-monetized for years, so films outside the sequence look like a massive growth avenue.

In the most recently-reported quarter, Disney saw solid performance in several categories. Revenue in the firm's Media Networks segment increased 7% year-over-year to $5.1 billion, with operating income advancing 2% year-over-year to $1.2 billion. Cable networks' earnings fell slightly from the year-ago period as higher content costs at ESPN for the NBA and NFL only partially offset strength from advertising at ABC Family and ESPN. Broadcasting benefited from increased advertising dollars during the political season and increased popularity from younger programs such as Revenge and Once Upon a Time.

The firm's Parks and Resorts segment was also fairly strong, with revenues increasing 7% year-over-year to $3.4 billion and operating income jumping 4% year-over-year to $577 million. Average ticket prices, occupancy rates, and consumer spending within the park have all increased, and we remain excited about the fundamentals of the domestic business, especially as the US economy improves.

Revenue in the firm's Consumer Products division was strong, increasing 7% year-over-year to $1 billion. Disney leveraged the sales growth into 11% expansion in segment operating income to $346 million. Given how good the segment performed and the growth potential with Star Wars, we believe the segment will be a key growth avenue in the future. We believe there's an increased likelihood that Disney will pursue Hasbro (NASDAQ:HAS) to further augment growth in this area, though the timing of any potential deal remains uncertain.

Perhaps the only soft spot during the quarter came from the company's Studio Entertainment segment. Revenue declined 5% year-over-year to $1.5 billion, resulting in operating income falling 43% year-over-year to $234 million. Not only was Disney lapping an incredibly tough first quarter of 2012, but performance from new titles such as Wreck-It-Ralph and Frankenweenie weren't as strong as the firm had hoped. When we lump in the John Carter debacle, calendar 2012 certainly wasn't Disney's best with respect to its theatrical releases.

During the quarter, Disney generated $1.1 billion in cash from operations, down from the prior-year period, but mainly the result of changes in working capital rather than a material change in business performance. This, along with increased capital investment, resulted in free cash flow of $599 million, down 46% compared to the same period a year ago. We're not concerned about the firm's quarterly decline in free cash flow, and we expect strong cash flow results during fiscal 2013.

Overall, we thought the quarter was good, but we're much more excited about the Star Wars announcement and Disney's potential to further monetize one of the most valuable film franchises in the world. Still, we believe shares are fairly valued at this time, and we won't be adding the company to the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: HAS is included in our Dividend Growth Newsletter.

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Tagged: , Entertainment - Diversified, Earnings
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