Third-quarter revenue increased 7% to $25.2bn ($25.4bn expected), with Experiences growing 10%, followed by Entertainment and Sports, which grew 6% and 4%, respectively.
Total segment operating profit increased 21% to $5.6bn, ahead of previous guidance. Much improved profitability in Entertainment and Experiences was partly offset by a decline in Sports, where margins were affected by rising costs.
Profit growth drove a 63% increase in free cash flow to $3.1bn. Net debt stood at $40.9mn, at the end of the period.
Fourth-quarter total segment operating profit is expected to be around $4.9bn. Full-year adjusted earnings per share (EPS) growth is expected to be around 12%.
The group has increased its share buyback target to at least $9bn this year.
The shares were up 3.9% in pre-market trading.
Our view
Disney’s third-quarter results revealed more evidence that the turnaround is moving in the right direction. Better than expected profitability, improved cash generation and an increase buyback target was enough to please investors on the day.
Disney is a three-headed monster. Linear TV/Sports, Experiences, and Entertainment (streaming & movies) each have their own unique complexities, and they’re not all moving at the same pace. Experiences remains the standout profit engine, with strong demand across parks and cruises supporting record quarterly revenue and profit. That is encouraging, particularly when some peers have pointed to softer consumer sentiment, but parks and cruises are still discretionary purchases and could see peaks and troughs if household budgets come under pressure.
Streaming continues to mature. Disney’s deep content library remains a major advantage, and the latest figures suggest that the direct-to-consumer business is becoming a more meaningful contributor to group profit rather than simply moving towards break-even. That gives the wider recovery story more substance, provided that Disney can keep users engaged and manage content costs carefully.
Scale matters in streaming, because once the technology and content base are in place, new subscribers can be added at relatively low incremental cost. But competition remains fierce, and Disney is still chasing Netflix when it comes to pricing power, engagement and subscriber loyalty.
Sports is the clearest area of pressure, with higher programming and rights costs weighing on profitability. That does not undermine the long-term appeal of ESPN, especially as sports remains one of the few types of content that audiences still watch live, but expensive rights to major sporting events put more pressure on Disney to keep driving up viewership.
At $41bn, Disney is carrying a fair whack of debt. A lot of that's a hangover from the mega-merger with Fox. The group has improved and substantial free cash flow means we aren't overly concerned. There are also plans to return at least $9bn of excess cash through share buybacks this year, but as always, no shareholder returns are guaranteed.
Disney is an excellent brand. Concerns about the company’s sensitivity to economic pressure have weighed on the valuation, overshadowing signs of improvement in the underlying business. We think that leaves some room for investor sentiment to turn more positive. But streaming remains a highly competitive space, and there’s potential for macroeconomic headwinds to weigh on demand at its theme parks, so investors should expect some ups and downs.
Environmental, social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, Disney’s management of ESG risk is strong.
Disney’s audit committee oversees cybersecurity and data security risks, and detection processes are periodically tested. But it has not disclosed whether privacy risk assessments or external security audits are conducted regularly.
Disney key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember that yields are variable and not a reliable indicator of future income. Keep in mind that key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.