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Disney - Television and Parks offset weak film schedule

Nicholas Hyett | 6 February 2019 | A A A
Disney - Television and Parks offset weak film schedule

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Walt Disney Co Common Stock

Sell: 178.57 | Buy: 178.60 | Change -4.86 (-2.65%)
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Disney's first quarter results were slightly ahead of expectations despite revenue being broadly unchanged on last year at $15.3bn and segmental operating income falling 8% to $3.7bn.

The group declared a dividend of 0.88 cents per share, 4.8% ahead of last year.

The shares were broadly unmoved in pre-market trading.

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Our view

A slightly lacklustre film schedule, increased investment in the theme parks business and looming cost associated with the Fox merger will all hold back profits this year. But Disney's a business for the long term.

A vicious bidding war with rival Comcast meant the Fox deal, which completes later this year, ended up costing the group more than it would have liked. And Disney has subsequently has to agree the sale of Fox's stake in Sky and spin off Fox's Regional Sports Network.

In an ideal world CEO Bob Iger might have wanted to hang on to both businesses. But the deal stacks up nonetheless, and the disposals will give the balance sheet a cash infusion. That should set it up nicely for the next stage in an aggressive corporate expansion.

A Direct-to-Consumer streaming service is a whole new world for Disney, and the competition is formidable. Netflix is spending over $10bn a year on content, and Disney's gearing up to go toe-to-toe with the tech darling through the launch of Disney+ (due in the second half of this 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 on the planet. That includes a whole range of content specifically for Disney+, ranging from Star Wars to Lady & the Tramp.

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

The mix of long term opportunity and short term risk means a price-to-earnings ratio that's broadly in line with its long term average is probably fair. Especially when combined with combined with a prospective yield of 1.6%.

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

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First Quarter Results

The market expected first quarter results to be tough, as Disney benefitted from blockbuster Marvel and Star Wars releases in the prior year. In the event, stronger showings from the Media Networks and Theme Parks business means they're better than anticipated.

Parks, Experiences & Consumer Products is the largest contributor to both revenues and profits, at $6.8bn and $2.2bn respectively. The division posted revenue growth of 5% in the quarter, and a 10% increase in profits, thanks to higher prices and increased customer spending in its US theme parks.

Media Networks saw both revenue and profits rise 7%, to $5.9bn and $1.3bn respectively. That reflects a strong result from the ABC Broadcasting network, more than offsetting weakness in Cable Networks where ESPN continues to struggle with mounting programming costs.

Studio Entertainment saw revenues decline 27% to $1.8bn and operating profits slide 63% to $309, as Mary Poppins and the Nutcracker failed to match last year's bumper results from Star Wars: the Last Jedi andThor: Ragnarok.

The fledgling Direct-to-Consumers & International business saw revenues slip 1% to $918m and losses more than double to $136m. The revenue decline was largely down to unfavourable currency movements, while higher losses reflect increased spending on streaming services Hulu, ESPN+ and Disney+.

Increased investment in theme parks, as well as lower operating profits, saw free cash flow fall 28% to $904m. The 21st Century Fox deal is expected to complete later this year.

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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.