Disney Remains A Top Performer

| About: The Walt (DIS)

The Walt Disney Company (NYSE:DIS) reported earnings that once again beat Wall Street estimates, helping to push shares up another 1.5% after-hours (press release available here). These numbers come as Disney continues to execute extremely well, leveraging its unmatched portfolio of brands to drive increased television revenue, a growing share of the global box office, and strong park attendance. Thanks to fantastic results, shares have rallied more than 32% past in the past twelve months, recently hitting a new all-time high before falling alongside the market in January. While shares have performed extremely well over the past year, Disney remains one of the more compelling long-term investments.

In their fiscal first quarter, Disney earned $1.04 while revenue was $12.3 billion. For comparison, analysts were looking for $0.92 on $12.3 billion in sales, so this was a solid earnings beat. These numbers also represented strong year over year growth with EPS up 32% while revenue grew 9%. Operating cash flow was up 6% to $1.2 billion, though increased investment in content (driven by the company's large pipeline of blockbuster films) led to an 8% decline in free cash flow to $554 million. Importantly, Disney reported strength across the board.

Media network revenue increased 4% to $5.3 billion while operating income was up 20% to $1.455 billion. Within this segment, there is a tale of two cities with cable (namely ESPN) performing well while broadcasting (namely ABC) struggles. Cable revenue was up 6% while broadcasting was down 2%, and cable income jumped 34% while broadcasting income fell 32%. ESPN continues to draw strong ratings and high ad revenue while increased subscription fees drive further growth. ESPN has shrugged off challenges from NBC Sports, Fox Sports 1, and CBS Sports; it remains the envy of the industry. ABC struggled with weaker ratings as there was no Presidential election, which did skew results a bit. Further, content costs for programs like Modern Family and failed pilots hurt results. It was also disappointing that ABC lost its bid to get Thursday Night Football to CBS. ABC remains challenged, but strength in ESPN is more than offsetting these issues.

Parks revenue jumped 6% to $3.6 billion, and Disney leveraged increased attendance to grow operating income 16% to $671 million. Disney's Hong Kong and flagship Orlando parks were especially strong in the quarter while a weak economy hurt Paris. Importantly, Disney has been able to pass on some price hikes, which are accretive to margins. Customers are also spending more at the parks on concessions and gifts, which is a sign of a strengthening economy. As Disney continues to roll out its Marvel and Star Wars characters to the parks, attendance should continue to grow. With a great product and improving economy, Disney parks continue to drive growth.

Disney's studio continues its exceptional performance with revenue growth of 23% to $1.9 billion, which led to a 75% increase in operating income to $409 million. Disney's performance was helped by a strong performance at the box office and on home video. In the quarter, Disney released Thor: the Dark World. While this film was profitable, its domestic take ($204 million) was a bit disappointing though it performed better overseas ($428 billion). Thor benefited from last year's The Avengers, though it is unclear if he will get another stand-alone film.

However, the real story of the quarter was Frozen. Since buying Pixar, Disney Animation has released higher quality films, and the dividends are now clear after Tangled and Wreck-It-Ralph. Frozen took the success to a new level. The film has held remarkably well at the box office. It finished 2nd domestically this past weekend, which is its 11th. The film will earn about $390-$400 million in the U.S., which is Disney Animation's best showing since The Lion King after adjusting for inflation. With an opening in China this week and in Japan in several weeks, this film will cross the $1 billion threshold globally. Disney's studio arm is now the best performing studio in the world, and it has a massive 2015 in the pipeline with The Avengers 2 and Star Wars 7. With Pixar, LucasFilm, and Marvel, Disney has an unmatched house of brands that will propel blockbuster box office results for the next 5-7 years.

Finally, Disney has leveraged its strong brand portfolio to grow consumer products revenue by 11% to $1.13 billion and operating income by 24% to $430 million. This result from consumer products is a sign of how important Disney's studio is. It has a halo effect throughout the entire company. When its films do well, it can sell more toys, helping this unit, and improve the park experience to increase attendance. With Marvel and Star Wars, it can offer toys that have great appeal to boys while films like Frozen drive strong results among girls.

Disney is operating on all cylinders. ESPN is more than making up for ABC's slack while a stronger economy is helping the parks. Disney's studio has established brands that are driving great results, which in turn is pushing consumer products higher. In 2014, Disney is on track to generate at least $48 billion in revenue and grow earnings north of 10% to $4.00-$4.10. With its 2015 film schedule, earnings will grow at least another 10% that year as well. At $73, the stock is trading at 18.4x earnings. Given its strong portfolio and long growth runway, shares could trade 20x earnings or $80. For long-term investors, Disney continues to make sense; it is simply a fantastic and well-run company. If investors get a chance to buy shares below $70, I would recommend aggressively buying the stock.

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.

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Tagged: , Entertainment - Diversified, Earnings
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