Disney (DIS) reported its second consecutive quarter of lower year over year revenue, operating income, and earnings growth as it faces difficult comps from the massive success of Star Wars: The Force Awakens and a big step up in programming expenses due to the new NBA rights contract that went into effect this season. While there were gives and takes across the company’s operating segments, little was surprising. A down year in FY17 followed by resumed growth in FY 18 has been widely and carefully telegraphed by management. Northlake still sees DIS as a core holding but expects stock performance to lag until we get closer to FY 18 (begins 10/1/17) and investors have more confidence in the resumption of growth. Once that happens we can see DIS shares trading toward $130 or 20x current estimates. DIS’s quality, unique business model, and strong balance sheet support a premium multiple despite legitimate concerns on growth for ESPN as the cable TV audience fragments to small channel bundles and OTT services.
Looking more carefully at the segments, media networks saw slightly weaker than expected performance from ESPN, while the ABC network appeared better. The film studio faced impossible comparisons and saw revenue -7% and operating income -17%. Nevertheless, DIS’s remarkable success at the box office continued in the quarter with Doctor Strange, Moana, and Rogue One: A Star Wars Story. Theme parks provided the best news, outperforming expectations for revenue and especially operating income. Operating margins at theme parks reached an all-time record with cost controls especially impressive. Encouragingly, the international parks performed well in Paris and Hong Kong, and Shanghai appears on track to meet expectations in its first year. Consumer Products, which is closely tied to the studio, had a tough quarter, with revenue and operating income declining over -20%. Management still forecast that Consumer Products would grow this year thanks to new movies in the Cars and Spiderman franchises. Cars has been a mammoth success in consumer products in the past.
Finally, there was a lot of discussion on the call about DIS’s investment in BAMTech, which is leading provider of OTT platform services for Major League Baseball as well as other companies such as HBO. Investors seem to have growing confidence in BAMTech as a standalone asset that could prove very valuable and also its ability to allow DIS to go direct-to-consumer new OTT services featuring Disney and ESPN content. BAMTech is improving investor sentiment toward DIS’s long-term growth.
DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.