An Attractive Entry Point for Wide-Moat Disney
While media networks continue to suffer due to weaker-than-expected advertising revenue and subscriber losses, the parks business expanded with Shanghai driving growth.
Disney (DIS) reported a mixed second quarter of fiscal 2017, as the top line came in below our expectations but EBITDA was above our projection. While media networks continue to suffer due to weaker-than-expected advertising revenue and subscriber losses, the parks business expanded with Shanghai driving growth. The increase in expenses was lower than we projected despite the expected large jump in NBA rights costs. We are maintaining our wide moat rating and our $134 fair value estimate. With shares trading in four-star range, the stock may offer an attractive entry point for investors.
Revenue improved 3% over last year to $13.3 billion, slightly below our estimate of $13.6 billion, as growth at media networks and parks and resorts more than offset the declines at the other two segments. Affiliate fee growth remains strong at 4% year over year despite slowing growth in pay television subscribers which was up 0.5% sequentially. While worrisome, we think that the inclusion of Disney channels in every OTT pay service that has launched demonstrates the strength of the firm’s overall channel package. EBITDA margin fell by 125 basis points due to higher content costs including the NBA but still came in ahead of our more conservative estimate.
The improvement at park and resorts was driven by the Shanghai resort and improved costs controls which offset inflation and wage increases. Shanghai is expect to reach 10 million visitors by this weekend, ahead of management's previous projection that it would occur around the one-year anniversary this June. Studio revenue was down 1% on a slightly weaker slate, which we expect for all of fiscal 2017. Revenue at consumer products fell 11% due to tough comps with high sales of Star Wars and Frozen last year. Overall EBITDA improved 12% to $4.4 billion, above our estimate, as the 1% decline at media networks was more than offset over 19% improvements at both the studio and parks and resorts segments.
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Neil Macker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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