Walt Disney Company: Magical Results For A Magical Company

Aug. 11, 2022 1:15 PM ETThe Walt Disney Company (DIS)NFLX15 Comments

Summary

  • The Walt Disney Company reported robust financial results for its latest quarter, with strength across most parts of the business.
  • The company continues to demonstrate why it's the industry leader in streaming and its weak spots are improving markedly.
  • Long term, the company is a great prospect and investors should continue to focus on the fundamentals above all else.
  • Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Disneyland

EnchantedFairy

After the market closed on August 10th, the management team at The Walt Disney Company (NYSE:DIS) announced financial results covering the third quarter of the company's 2022 fiscal year. Leading into the release, the market seemed scared of what might transpire. There were concerns over the impact that a potential recession, higher interest rates, and inflation, might ultimately have on the willingness of customers to visit its parks and otherwise engage with its content. There were also other concerns as well, such as the impact that politics might have on the company’s popularity. In particular, the uproarious ‘anti-woke’ chants stoked fear amongst market participants regarding how strong the brand might be at this time. As was clearly a surprise to the broader market but was not a surprise to me or other individuals who are bullish about the company, the company blew past expectations and reported data that showed significant strength pretty much across the board. Truly, the company’s future prospects look bright, and it most definitely deserves the ‘strong buy’ rating I have given it.

A streaming homerun

Perhaps no better starting point exists when it comes to analyzing the financial performance of The Walt Disney Company than the company's streaming initiative. Heading into the quarter, there were concerns about the health of the streaming space. Data was mixed, with rival Netflix (NFLX), for instance, reporting a drop in subscribers in the amount of 0.97 million while previously forecasting a decline of 2 million. So on one hand, you had a giant in the streaming space post weakness but that weakness came in far better than anticipated. Fortunately for investors in The Walt Disney Company, the company posted tremendous results when it came to its hallmark Disney+ service.

Subscriber Data

Author - SEC EDGAR Data

The firm ended the third quarter of its 2022 fiscal year with 152.1 million subscribers on the platform. That's 14.4 million above the 137.7 million the company had just one quarter earlier and it represents an increase of 36.1 million, or 31.1%, over the 116 million the business had at the end of the third quarter of last year. This blew past expectations of 10 million net additions for the quarter, signaling that while there might be some weakness in some parts of the streaming space, that weakness does not apply to a top-tier company like this. The only downside when it came to Disney+ was that its growth in its domestic market it is very weak. The company added just 100,000 subscribers domestically, taking that number from 44.4 million to 44.5 million. Clearly, it is reaching market saturation here at home. This may seem odd when you consider that, as of the end of the latest quarter, Netflix had 73.3 million paid subscribers across the US and Canada combined. But when you consider that The Walt Disney Company’s Disney+ service has a different and likely smaller market, this becomes easier to digest. Instead, nearly all of the growth for the platform came from overseas. What also removes some of the pain here is that while the Netflix data isn’t exactly a perfect comparable, the number of subscribers it had across the US and Canada was actually down by 1.3 million in the latest quarter. So to see any growth from Disney+ is great.

There was very little negative news from the company this quarter. Perhaps the biggest was the fact that management reduced their 2024 target for global Disney+ subscribers down from between 230 million and 260 million to between 215 million and 245 million. Beyond that, the closest thing to bad news involves the growth it saw across its other two streaming platforms. For ESPN+, the company added just 500,000 subscribers, taking it from 22.3 million in the second quarter of the year to 22.8 million this year. Meanwhile, Hulu added just 600,000 users, taking its user base from 45.6 million to 46.2 million in three months. Any sort of growth in this environment should be considered a net positive. But it would have been nice to see performance on this front come in a bit stronger.

Subscriber Data

Author - SEC EDGAR Data

Despite the fact that nearly all of the growth achieved by Disney+ came from international markets, pricing for the company per user per month remained flat at $4.35. This was not the case, however, when it came to its other streaming services. ESPN+ saw pricing decline from $4.73 per month to $4.55 per month, while Hulu experienced a decline from $19.56 per month to $19.41 per month. Although this may not seem like much, keeping user data flat with the latest quarter, the decline in pricing for ESPN+ translates to $49.2 million in missed revenue per year, while the drop for Hulu would impact it by $83.2 million annually.

What's really interesting, however, is that The Walt Disney Company has decided to make a rather large move when it comes to pricing moving forward. As you can see in the image below, the company is increasing its pricing for its various services and creating new optionality for its customers. Most notably, it plans to increase the cost for the ad-free version of Disney+ from $7.99 per month to $10.99 per month. For budget-conscious customers, it plans to introduce an ad-supported version of the platform for $7.99 per month. For the legacy bundle involving Disney+, Hulu with ads, and ESPN+ with ads, the company is increasing pricing for its existing customers to $14.99 per month, while a version of this without advertising for Hulu for new customers will increase to $19.99 per month. As far as what the company has made clear, these changes apply to the domestic market. Nobody knows what the full impact will be since we don't know exactly how customers will respond. But to put it into perspective just how big a deal this could be, increasing its monthly pricing by just $1 across all three platforms globally translates to $2.65 billion in additional revenue and, in turn, pre-tax cash flow for the business.

Pricing

Disney

Pandemic-hit operations are improving

In my earnings preview article about the company, I said that investors should also keep a close eye on the parts of the company that were hit particularly hard as a result of the COVID-19 pandemic. The most significant of these would be the Parks & Experiences portion of the enterprise. The data revealed by management was truly remarkable. According to the company, attendance at its parks globally was up 69% year over year. The strength was mostly in the domestic space, with attendance up 93% compared to the 17% increase seen in international markets. Per capita guest spending was up 18%, led by a 28% rise in international spending compared to a 10% increase in domestic spending. Domestic hotel occupancy, meanwhile, was a robust 90%. That compares to the 50% that it was one year earlier. Internationally, there was still some weakness for the company, with occupancy of 61% compared to the 20% experienced the same time last year.

Attendance Data

Disney

The impact on the company's finances was awesome. Revenue across the Parks & Experiences portion of the enterprise came in at $6.21 billion. That's over double the $3.18 billion reported just one year earlier. It's even stronger, in fact, than the $5.55 billion reported for the third quarter of the company's 2019 fiscal year, which was the last third quarter before the pandemic. Once again, the domestic market led the way. Revenue of $5.42 billion crushed the $2.66 billion seen just one year earlier. It was also above the $4.42 billion experienced in the third quarter of 2019. Internationally, revenue of $788 million was stronger than the $526 million experienced one year earlier. But it was still lower than the $1.13 billion experienced overseas in 2019’s third quarter. This also had a huge impact for profitability. Operating income for this set of operations turned from a negative $208 million in the third quarter of last year to a positive $1.59 billion the same time this year.

Park Data

Author - SEC EDGAR Data

Another important piece of the company that I said investors should pay attention to was the theatrical distribution side. With the box office coming back to life, it was all but certain that revenue for the company would increase year over year. But until now, we didn't know what that picture might look like. During the quarter, the company reported theatrical distribution revenue of $620 million. Although this dwarfs the $140 million experienced in the third quarter of 2021, it pales in comparison to the $2.24 billion seeing the same quarter of 2019 and the $1.51 billion seen the same quarter of 2018. This is not a surprise when you consider how few major films the company has put out so far this year. At the same time, however, it also leaves investors something to look forward to as the company continues to recover.

Theatrical Data

Author - SEC EDGAR Data

Disney's debt and cash flow both improved

In my prior article, I also said that investors should pay attention to debt and cash flow. During the quarter, the company reported net debt of $38.64 billion. That translates to a decrease of $108 million compared to the $38.75 billion the company reported just one year earlier. This also is noteworthy because it’s the fourth quarter out of the past five in which net debt decreased sequentially. This was made possible, in part, by robust cash flow. During the quarter, operating cash flow came in at $1.92 billion. That compares to the $1.47 billion generated just one year earlier. For the full nine-month window of the current fiscal year, cash flow came in at $3.48 billion. This compares favorably to the $2.93 billion generated in the same time of the 2021 fiscal year. If we adjust for changes in working capital, however, the increase in cash flow was even greater, rising from $3.03 billion in the first three quarters of 2021 to $5.80 billion the same time this year. This cash flow picture also ties in nicely with the fact that revenue of $21.5 billion beat analysts' expectations by $490 million, while earnings per share of $1.09 beat expectations by $0.10.

Debt and Cash Flows

Author - SEC EDGAR Data

Takeaway

Based on all the data provided, I have to conclude that The Walt Disney Company is incredibly healthy at this time. The picture for the company continues to improve and I see no reason to believe that this picture will change in the near term. Growth was particularly strong on the streaming front and between that growth continuing and the price increases, investors should expect that picture to get even better moving forward. Cash flow is positive and improving, while net debt is decreasing. And although the theatrical distribution side of the company still has plenty of room for improvement, it is improving nonetheless at a time when the Parks & Experiences portion of the business is returning to full health or coming awfully close to it. I have no regret in rating the business a ‘strong buy’, and I believe that the overall trend for investors will push shares even higher still. This also should send a strong message to those who are bearish about the firm. When it comes to concerns over the broader economy and other related issues, the entertainment giant's brand is strong enough to not only weather that storm but to thrive in it. At least that has been the case so far. And when it comes to issues like ‘wokeness’, it sends the strong message that it is never a good idea to mix politics with business. Especially when the company in question is a high-quality industry leader that makes its money from promoting higher ideals and family values.

Crude Value Insights offers you an investing service and community focused on oil and natural gas. We focus on cash flow and the companies that generate it, leading to value and growth prospects with real potential.

Subscribers get to use a 50+ stock model account, in-depth cash flow analyses of E&P firms, and live chat discussion of the sector.

Sign up today for your two-week free trial and get a new lease on oil & gas!

This article was written by

Daniel Jones profile picture
23.72K Followers
Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

Disclosure: I/we have a beneficial long position in the shares of DIS either through stock ownership, options, or other derivatives. 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.

Recommended For You

Comments (15)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.