Walt Disney Co (DIS) Common Stock
HL comment (14 May 2021)
Revenue fell 13% to $15.6bn in the second quarter, behind analyst expectations of $15.9bn. The declines reflect continued disruption to the Disney Parks, Experiences, and Products division because of the pandemic.
Group operating profit rose 2% to $2.5bn because of a stronger performance from the Media and Entertainment business. In the period, Disney recognised a $414m charge relating to the reduction in the value of some assets and staff redundancies across parks, retail stores and one animation studio.
The shares fell 3.9% in after-hours trading.
It is no surprise to see revenue continue its downwards trajectory. The pandemic has decimated the revenue stream from Disney's famous parks.
Given the significant quantities of debt associated with building a world class resort, shutting the doors of its theme parks for a long period is financially painful- even after brutal and high-profile job losses.
That's being partially offset by rapid growth in the group's streaming services. Disney+, which has racked up about half the number of Netflix's subscribers, despite being a relative latecomer to the streaming party. Throw in ESPN+ and Hulu, and Disney has now surpassed 75% of Netflix's current total. And, crucially, as the division builds scale, Streaming profit losses are narrowing.
However, we think the underappreciated hero is the less glamourous, but robust broadcast and cable businesses. Revenues have proven remarkably resilient - all the more so when you consider how crucial advertising is to results. The division currently accounts for a large chunk of group revenues and, last quarter, pretty much every drop of profit.
Over time the balance of power will slowly shift away from cable and broadcast. But it's this diversity which is proving crucial to Disney's success and indeed survival during the pandemic. An excellent content catalogue, whether that's Princess in Parks or Quarterbacks on ESPN, is one thing - but Disney's ability to sell those products through a variety of channels, multiplies the benefit many times over.
It's not all a fairy-tale though.
The $71bn acquisition of Twenty First Century Fox loaded the business up with debt. That increased interest costs by 52% last year, a burden that must be met despite lower profits, adding to the execution risks that always come with mega mergers. Disney does have substantial cash on hand, but an ideal scenario would see profits pick back up sooner rather than later, to stop those bills becoming burdensome. At the moment, profits are expected to recover to pre-pandemic levels until the end of the next financial year. We wouldn't like to see that goalpost get pushed.
There's no getting away from the fact the pandemic has been hard on Disney. However, the group still holds plenty of long-term potential in our view. The power of Disney's unparalleled stable of copyrights and brands can't be overstated, and should stand it in good stead in the long-run. Our feeling is that coronavirus is a bump in the road, not a derailing of the investment case.
Just a quick note on valuation here. You'll notice from the box below that the group's PE ratio is currently well above the long-term average. The stellar valuation is partly down to the pandemic-depressed earnings expected this year, but also reflects a genuine investor enthusiasm for Disney's direct to customer streaming service. It's a vote of confidence by the market, but also sets Disney a high bar for success.
Disney key facts
- Price/earnings ratio: 48.6
- Ten year average Price/earnings ratio: 20.6
- Prospective dividend yield (next 12 months): 0.7%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Second quarter results
Media and Entertainment Distribution saw revenues rise 1% to $12.4bn, led entirely by increased direct-to-consumer (DTC) revenues which were up 59% to $4.0bn. Operating profit was more resilient, and rose 74% to $2.9bn, as DTC losses narrowed.
Within DTC, Disney's streaming businesses now have 159m subscribers across Disney+, ESPN+ and Hulu. Disney+ subscribers more than tripled compared to the same time last year, to 103.6m. Linear networks, which include ABC, ESPN and Star, saw revenue fall 4% to $6.7bn, partly because of lower domestic advertising revenue, especially surrounding the Academy Awards. This was more than offset by programming and marketing cost savings, lower cost impairments and the sale of more profitable content in the Content Sales and Licensing business.
Parks, Experiences and Products saw sales fall 44% to $3.2bn, while operating profit fell to a $406m loss. The declines reflect a 58% fall in Domestic Parks & Experiences sales to $1.7bn, while International sales were down 45%, and consumer products were up 13%. Disneyland Resort, Disneyland Paris and the cruise business were closed for the entire quarter.
Free cash flow was $623 compared to $1.9bn at the end of March 2020, and net debt stood at $40.3bn, down from $40.7bn.
Disney said it will continue to incur additional costs relating to the pandemic, to ensure government compliance and safety for employees, talent and guests. This could cost around $1bn in the current financial year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.
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