Weak Disney Showing, Maintaining Fair Value Estimate
Revenue fell short of expectations but in line with our projections for the wide-moat firm.
Disney (DIS) missed expectations for its fiscal 2018 third quarter as revenue and operating income fell just short of Street expectations, but revenue came in line with our lower projection. The studio segment continues to outperform even with the Solo movie disappointment as Avengers: Infinity War exceeded $2.0 billion in global box office and Incredibles 2 will likely soon become the highest grossing Pixar film. CEO Bob Iger appears focused on the Fox media assets and the firm's direct-to-consumer efforts as he used his prepared remarks to address these two potential avenues of growth for Disney. We are maintaining our wide moat rating and our fair value estimate of $130.
Revenue for the quarter increased 7% year on year to $15.2 billion. Media networks revenue was up 3% due to growth at both cable networks and broadcasting segment. Affiliate fee revenue was up 5% in the quarter as higher rates continue to offset the 2% decline in subscribers. Disney has a number of distribution renewals over the next two years which will be a good test of the strength of ESPN. The subscriber decline has decreased from the 3% quarterly subscriber loss level of the last several quarters. The ad revenue at broadcast networks was up 3% as higher pricing offset lower impressions due to ratings. Management noted that scatter pricing is 23% above the upfront rates as we believe the ABS stations are benefiting from competitive primary races. Parks and resorts remains an area of strength with 6% growth despite only one week of Easter occurring in the quarter versus two last year. While domestic attendance was only up 1%, per capita spending growth of 5% was impressive as was the per room spending growth of 8%. Revenue at the studio segment improved 20% due to a strong theatrical quarter along with growth in television distribution. Segment operating income for the firm fell by 90 basis points to 30.3% as the revenue growth was more than offset by increased marketing and programming costs.
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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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