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I have long said that The Walt Disney Co. (NYSE: DIS) is the one entertainment stock that should be in everyone’s portfolio. First-quarter earnings for FY15 show the many reasons why. First let’s hit the numbers for Disney earnings and then discuss what they mean.
Year over year revenues were up 9% to $13.39 billion. Segment operating income jumped 17% to $3.545 billion. Net income rose an amazing 19% to $2.182 billion. Translating all this to EPS, DIS stock leapt from $1.03 per share to $1.27 per share, a 23% increase.
Estimates of $1.07 were blown away by a blizzard the size of Frozen.
The robust top and bottom line numbers translate to extraordinary cash flow metrics. Operating cash flow exploded 53% to $1.855 billion, and free cash flow did the same, up 55% to $857 million.
Years of Growth
What is particularly impressive about Disney earnings is how, after all these years, the company still delivers double-digit growth in every category, and generates enormous degrees of free cash to continue to reinvest in its business. This is how Disney stays on top of the entertainment world.
Producing top-quality entertainment takes capital. In film and TV, the keys are to produce enough content so that the winners make up for any losers, although Disney rarely has a loser. That’s why DIS stock has never paid a substantial dividend. It needs that money to invest in its divisions.
Let’s look at some of the segment results. Media Networks, which includes ABC networks, Disney Channel, and ESPN, experienced 11% revenue growth. Broadcasting operating income rose 35% but cable network fell 2%. The decrease comes from Disney launching channels in Germany, which required new pilots to be produced and – as mentioned – they kind of fizzled. Otherwise, revenue rose because of affiliate fee increases and higher ad revenues.
Naturally, along with the movies that this very successful division creates, come the plush toys and every other consumer product in the segment. The reason this segment always does well is because there are always kids being born, and every kid is introduced to Disney, and every kid is given Disney toys. No matter how bad times may get, kids will always exist and want Disney toys.
You can bet that every time a Disney movie is made, somebody in this segment says, “Hey, make sure there’s a cute creature in there, like a talking snowman.”
That helps explain the 22% increase in revenues to $1.4 billion and operating income increasing a whopping 46% to $626 million.
There’s the Interactive Segment, driven by the popular Club Penguin virtual world and other titles. Revenues were down about 5% but operating income increased 40% to $75 million.
Disney’s Pile of Cash
Amidst all this cash flow, it’s easy to forget that Disney stock carries a lot of debt, and that’s because total interest for the quarter is only $69 million. Disney has a lot of expense in the Studio segment, but as far as capex goes, that’s all park-related. The cash flow again allows for that maintenance, which came to $1 billion this year. On top of all this, Disney stock has $5.077 billion in cash on hand. Imagine what they can do with it.
With FY15 estimates now expected to come in at $4.91 per share, up 14% from $4.32 per share, and not even including an expectation for more estimates being beaten, Disney trades at 19x FY15 earnings. I give Disney stock a 10% premium each for great cash flow, lots of cash on hand, and world-class brand name.
At worst, then, it’s trading at fair value, so you should expect 14% to 16% appreciation plus 1.3% yield going forward. That’s unquestionably a buy.
What is Apple Hiding?
You’ll never hear about this from the 42 regular market analysts covering Apple – because either they don’t know about it… or they don’t want you to know about it. But Apple’s hiding a major secret from investors. See, all its most prized products – the ones everyone lusts after – would be utterly worthless without this one company. And there’s one other thing Tim Cook doesn’t want to let slip – especially to Apple investors: shares of this “secret” company do five times better than AAPL shares every time Apple launches a new product. Check out the full story now – click here.