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Walt Disney - Fox is in the box. Next step, Netflix

Nicholas Hyett | 12 November 2018 | A A A
Walt Disney - Fox is in the box. Next step, Netflix

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Walt Disney Co Common Stock

Sell: 183.45 | Buy: 183.46 | Change 0.13 (0.07%)
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Full year group revenue hit a record high of $59.4bn in 2018, up 8% on the year before. Net income jumped 40% to $12.6bn, thanks to lower taxes and higher operating profit.

The shares rose 1.7% in aftermarket trading.

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Our view

Disney's had a blockbuster year, and that's putting it mildly.

Full year results were well ahead of market expectations - with strong results across the business. That's despite the distraction of a bitter corporate struggle over 21st Century Fox. Disney has subsequently agreed to sell Fox's stake in Sky to rival Comcast and spin off Fox's Regional Sports Network to satisfy US regulators.

In an ideal world it might have wanted to hang on to both businesses, but the sales will give the balance sheet a cash infusion which sets it up for the next stage in an aggressive corporate expansion.

A Direct to Consumer offer is a whole new world for Disney, and the competition is no less formidable than Comcast. Netflix is spending around $10bn a year on marketing and content, and Disney looks like it's gearing up to go toe-to-toe with the tech darling through the launch of Disney+ (due to launch in the second half of next year).

Disney has several major advantages over its younger rival. A back-catalogue to die for, $9.8bn a year of free-cash and some of the best copyright IP on the planet. It's launching a whole range of exclusive content specifically for Disney+, ranging from Star Wars to Lady & the Tramp.

It would be foolish to dismiss the challenges ahead - despite some early forays with Hulu and ESPN+, Disney lacks Netflix's digital expertise. Meanwhile mega mergers like Disney/Fox come with lots of execution risk, not least that key staff are lost in the transition.

There's opportunity and risk at Disney at the moment, so a price-to-earnings ratio that's broadly in line with its long term average is probably fair when combined with a prospective yield of 1.5%.

A solid balance sheet and significant organic cash flows means 85 years after Disney first asked viewers "Who's afraid of the big bad wolf?" it's the one with all the puff. But only time will tell if Netflix is made of bricks or just a house of cards.

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Full Year Results

Revenue growth was driven by 10% growth in Parks & Resorts and 19% growth in Studio Entertainment, hitting $20.3bn and $10bn respectively. Disney's largest division, Media Networks, saw revenue rise just 4%, to $24.5bn. Consumer Product revenue fell 4% to $4.7bn.

Disney's share buyback boosting earnings per share growth to 47%. Excluding one off effects, such as the cut in US taxes, EPS rose 38%. A 4% decline in operating income from Media Networks, which now stands at $6.6bn, reflects lower advertising revenue and higher losses at Hulu and BAMTech.

Free cash rose 12.7% to $9.8bn.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.