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The Walt Disney Co. (NYSE: DIS) delivered strong earnings again this past quarter, even though investors seem to be concerned about the ESPN division. Frankly, I’m not terribly concerned. The company has been overseen by a top-notch CEO who has shown the ability to change with the times and not let Disney rest on its laurels.
There was strength across the board. Revenues grew a robust 8.9% for the quarter and 6.9% for the year. Segment operating income exploded by 27% in the quarter, lifting the year’s total to 13%. The big bottom line numbers that we care about the most – net income and operating cash flow – lifted 6.9% for the quarter, and 11.9% for the year.
Disney has been steadily increasing its amazing free cash flow generation, which was $6.64 billion this fiscal year. That’s an astonishing amount of money, and it permits the global entity the flexibility and ability to do just about anything it wants organically, or to buy other properties.
Looking at each segment, there was a 12% quarterly increase in cable network revenue while operating income leapt 29.9%. On the fiscal year, revenues increased almost 10% and operating income moved up 5%.
If you’ve been following travel and hospitality, that sector has been on fire, and we are seeing this with Disney’s parks and resorts segment. The strong growth there allows Disney to raise prices on its park entry fees and on food and beverage inside the parks. People may complain, but they keep coming.
Disney is already seeing some merchandising benefit from the new “Star Wars” movie. That’s going to be huge, and should make its first quarter a blowout.
So what’s happening at ESPN? Well, the good news is that the SEC football channel was launched and performed extremely well. This helped off set some ESPN subscriber declines, and lower ratings on many of its shows.
Sports are an American fixture, so ESPN isn’t going anywhere. It just will need to find a way of shifting how it makes money. I think we will see Disney try a few things like streaming subscriptions for favorite sports teams or the acquisition of one of the very lucrative real-money fantasy football websites.
Interestingly, the one area Disney still struggles is with interactive. Segment operating income did move up $12.9 million to $30.9 million, amidst a decline in revenues by $14.9 million to $346.9 million. While Disney Infinity is making inroads, the problem with interactive is that it is just so darn expensive.
That’s actually a concern across the entire company. While I love Disney as an entertainment play above all others, it is a diversified conglomerate and entertainment requires a lot of capital. It is all about producing fresh content. That means revamping the parks, too, since the rides are considered content. They also require a lot of maintenance. That’s another reason to love Disney’s cash flow.
So, as Disney earnings arrived at $8.378 billion for the year, and Disney stock now has a $196 billion market cap, the stock trades at 24 times estimates. That’s expensive: 13.3% net income growth (plus dividend) means that fair value would be a price-earnings ratio of 13.3.
Now, I do provide a 10% premium for brand name, cash on hand, and free cash flow generation – each – which lifts the fair value P/E ratio to 17.2, but that means fair value is about $85. Disney trades at $115.
I think you must hold Disney stock if you have it. If you are going to buy, you must buy it for the very long term.
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