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Walt Disney - Parks and Studios boost profits

Nicholas Hyett | 8 November 2019 | A A A
Walt Disney - Parks and Studios boost profits

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Walt Disney Co Common Stock

Sell: 148.35 | Buy: 148.38 | Change 0.73 (0.49%)
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Fourth quarter revenues rose 34% to $19.1bn, bringing Disney's revenues for the full year to $69.6bn - boosted by the acquisition of Twenty-First Century Fox in March.

However, underlying earnings per share (EPS) fell 28% to $1.07 in the quarter, and ended the year 25% lower at $6.27, as losses mounted in the Direct-to-Consumer business ahead of the launch of Disney+.

The shares rose 4.8% in aftermarket trading.

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Our view

It's been a big year for Disney. Not only did it acquire 21st Century Fox for $71bn, it's about to launch its new streaming service too. That's weighed on profits, but given all the moving parts we'd encourage investors to take a long term view. Disney's business model is designed to deliver over decades not months.

Fox ended up costing more than Disney would have liked. But the deal stacks up nonetheless, and disposals, of Sky and Fox's regional sports networks, should give the balance sheet a much needed cash infusion. That would set Disney up nicely for the next stage in an aggressive corporate expansion.

CEO Bob Iger is splashing the cash on new Marvel and Star Wars attractions at theme parks too. Guests have generally continued to queue up at the gates despite recent hikes in ticket prices, and that's before many of the new attractions come online. A portfolio of hotels and cruise ships helps to feed the apparently instantiable demand for all things Disney.

The soon to launch streaming service, Disney+ is a whole new world for Disney. The competition here is formidable. Netflix is spending over $13bn a year on content, and Apple's just entered the fray. The service is expected to launch before the end of the year - so something to keep an eye on.

Disney has several major advantages over its younger rivals. A back-catalogue to die for gives the group some of the best copyright on the planet, and despite nearly tripling investment into the business it's remained cash positive this year.

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.

A wave of optimism following the completion of the Fox deal and Disney's recent investor day, which focussed on streaming, has seen the company's PE ratio shoot up to 23.4 times. That's well above the longer term average of 16.5 and has pushed the prospective yield down to 1.4%.

Despite the hefty valuation we continue to be impressed by Disney's strength in depth. The group's ability to take intellectual property generated in the studios business, and package it for consumers across numerous platforms is hugely valuable. Having spent 2019 getting its ducks in a row, 2020 should be the year the House of Mouse shows the hard work can pay off.

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Fourth Quarter Results

Disney's single largest division, Media Networks, saw operating profits fall 3% over the quarter to $1.8bn. Higher costs in both the Cable Networks, driven by ESPN, and Broadcasting divisions, caused by ABC, offset revenue increases of 20% and 26% respectively.

In Parks, Experiences and Products revenues rose 8% to $6.7bn with operating profits rising 17% to $1.4bn. Profits were boosted by merchandise revenue for Frozen and Toy Story and higher spending at parks. International park performance was comparable to last year as growth in Paris and Shanghai was offset by decreases in Hong Kong.

Studios revenues increased 52% to $3.3bn and operating profit rose 79% to $1.1bn, driven by stellar performance from The Lion King, Toy Story 4 and Aladdin.

The Direct-to-Consumer & International business saw losses more than double to $740m during the quarter, following the integration of Hulu and increased investment in ESPN+ and Disney+.

Disney finished the year with net debt of $41.6bn, compared to $16.7bn last year, following the acquisition of Fox. Free cash flow for the year fell to $1.1bn, compared to $9.8bn last year.

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