Walt Disney Co (DIS) Common Stock

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Disney reported fourth-quarter revenue of $22.5bn, in line with the prior year ($22.7bn expected). Growth in the Sports and Experiences divisions were offset by declines in Entertainment.

Segment operating profit fell by 5% to $3.5bn ($3.5bn expected). This was driven by a sharp decline in Entertainment, largely due to strong content sales in the prior year.

Full-year free cash flow fell by $1.5bn to $10.1bn. Net debt was $36.3bn at year-end.

In the new year, underlying earnings per share (EPS) are expected to grow at double-digit rates (market forecast: 9%).

A dividend of $1.50 per share was announced. Share buybacks are expected to double to a target of $7bn.

The shares fell by 7.8% on the day.

Our view

Disney had a mixed fourth quarter, with revenues a touch light but profits landing in line with market expectations thanks to strong Disney+ growth and a record performance from its Parks & Experiences segment. The poor market response on the day seems a bit overdone to us, especially given the better-than-expected profit outlook for the new year.

Disney is a three-headed monster. Linear TV/sports, theme parks, and streaming each have their own unique complexities. And it’s rare that the external factors that benefit each segment blow favourably at the same time.

In streaming, profitability has continued to improve sharply, albeit from a low base. Disney’s edge is its pre-existing stable of intellectual property. It has a pre-loaded and pre-approved content cupboard.

Getting a streaming service off the ground wasn’t cheap. But with most of the groundwork now in place, operations are being streamlined. New subscribers can be added with little additional cost, meaning any new subscription revenue largely flows straight down to the profit line. And after years of struggle, streaming profit growth is helping to offset linear TV declines.

While recent progress is commendable, we’re wary that the competitive landscape remains very tricky. Disney is still a long way behind industry leader Netflix when it comes to pricing power and subscriber loyalty.

Then there's the Experiences segment (theme parks, cruises, etc) which is still Disney’s largest profit driver. These are another way for Disney to juice the same intellectual property for cash over and over again.

We continue to think parks are a strong asset, with loyal fans likely to flock to the gates for years to come. Despite the growing uncertainty that’s been stirred up by tariffs and the opening of a rival theme park in Orlando, Disney theme parks continue to perform well. But this part of the business is more likely to be sensitive to consumer sentiment and see peaks and troughs.

At around $36bn, Disney is carrying a fair whack of debt. A lot of that's a hangover from the mega-merger with Fox. The group's improved and substantial free cash flow means we aren't overly concerned.

There’s no denying it, Disney’s an excellent brand. Growth in the streaming business is likely to be the main driver of sentiment in the near term, and we’re happy that profits are flowing in from this side of the business. But given the highly competitive streaming landscape and potential for headwinds at its theme parks, the current valuation looks about right to us.

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’s not disclosed whether privacy risk assessments or external security audits are conducted regularly.

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.

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