Walt Disney Co (DIS) Common Stock

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Disney’s first-quarter revenue rose 5% to $26.0bn (consensus: 4%). All divisions were in growth territory, with the Entertainment segment growing at the fastest pace, up 7%.

Segment operating profit fell by 9% to $4.6bn, slightly better than market forecasts. Growth in Experiences was offset by double-digit percentage declines in Sports and Entertainment due to higher production and marketing costs.

Free cash flow fell from an inflow of $0.7bn to an outflow of $2.3bn due to higher tax payments and increased investments in its parks and resorts. Net debt rose by $4.6bn to $41.0bn since year-end.

Second-quarter segment operating profit is expected to be in line with the prior year’s $4.4bn. Full-year guidance remains unchanged, with underlying earnings per share expected to grow at a double-digit rate.

The shares fell 2.1% in pre-market trading.

Our view

Disney managed to narrowly beat expectations in the first quarter, thanks to continued strength in its parks. But soft subscriber growth for its streaming services weighed on sentiment, and the shares dipped lower on the day.

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, pre-approved content cupboard that consumers are willing to pay higher fees to get and keep access to.

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.

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 $41bn, 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 was a blip on this front in the first quarter, but that looks to be more of a timing issue than anything more sinister. Cash flows should improve over the rest of the year.

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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