Disney Looks Cheap, Sees Uptick in Consumer Spending at Parks in 3Q

| About: The Walt (DIS)
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Walt Disney (NYSE:DIS) reported decent fiscal third quarter results Tuesday that showed revenue growth of 9% and solid net-income expansion of 11%. We like the strong brands at Disney and would consider adding it to our Best Ideas portfolio under $28 per share on the basis of our discounted cash-flow process. We provide our valuation summary below and make available our discounted cash-flow valuation model template here for investors to value any operating firm in their portfolio.
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Source: Valuentum Securities Inc.
Disney experienced solid sales growth from is parks and resorts (up 12%) - including Disney Cruise Line and Hong Kong Disneyland Resort - and consumer products (up 13%) as well as merchandising licensing in its fiscal third quarter. These two segments also led the charge with respect to operating income expansion, with media networks also posting nice double-digit growth thanks to strong performance from cable networks (specifically ESPN) and broadcasting (driven by lower programming and production costs). As it relates to the health of the consumer, the firm noted that it experienced higher guest spending and attendance at its domestic parks and resorts–-a source of strength and an interesting, positive data point regarding the U.S. economy.
Lagging performance was evident in the firm’s studio entertainment segment, where sales were flat but operating income fell by more than half. The company blamed restructuring and impairment charges and the results of Cars 2 and Thor in the current quarter versus Toy Story 3 and Iron Man 2 in last year’s quarter for the underperformance in the segment. Interactive media, while showing strong top-line expansion, also fell meaningfully on the operating line. Cash from operations remained strong in the period, but free cash flow has faced some pressure so far this year due to purchases related to its new cruise ship, the Disney Dream, and domestic park and resort expansions.
Despite the share weakness following Disney's report, we think the firm put up a fine quarter and view it as a solid long-term holding. If the market puts the firm's shares on sale (under $28 per share), we'd consider adding it to our portfolio, which continues to outpace the S&P 500 by roughly 1,000 basis points.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.