Setting the pace and FY2018:
Disney (DIS) is fresh off reporting its first quarter for FY2018 and has set the stage for a strong year ahead. The studio segment is off to a great start with record breaking movie releases such as Thor: Ragnarok, Star Wars: The Last Jedi and Coco surpassing $854 million, $1.33 billion and $715 million in worldwide box office receipts, respectively. Black Panther entered the fray with a record breaking President’s Day weekend opening of $242 million in domestic box office sales. Disney has one of its biggest movie slates for FY2018 with Ant Man and The Wasp, The Avengers: Infinity War, Solo: A Star Wars Story, The Incredibles 2 and Mulan (live action film) around the corner. Parks and Resorts are posting strong growth where revenues grew 13% year-over-year in Q1 and operating income now surpasses its Media Networks segment income, bringing in $1.35 billion vs. $1.19 billion, respectively. Disney is aggressively trying to shore up its stalling Media Networks segment with a confluence of growth catalysts via streaming with Hulu (30% stake and will likely be expanded to a majority 60% stake after the Fox acquisition), BAMTech, Sling, ESPN streaming service and a Disney branded service coming in 2019. Disney is evolving to address the deteriorating Media Networks business segment with major streaming initiatives. Disney offers a compelling long-term investment opportunity considering the growth, Fox acquisition, pipeline, Media Networks remediation plan, diversity of its portfolio, tax reform, share repurchase program and dividend growth.
Disney announced that it is acquiring 21st Century Fox’s assets to further drive growth for $52 billion. This acquisition brings in noteworthy studio assets such as more Marvel properties (X-Men, Fantastic 4 and Deadpool) and Avatar along with TV content, regional sports and a 60% majority stake in Hulu. Disney shelled out $52 billion to acquire many of Fox’s assets to drive future growth in regional sports, movies, TV programming and foreign market penetration. This is a transformative acquisition as Disney will take control of the movie studio and significant TV production assets and gain exposure to international markets through Fox’s networks via a 39% ownership of Sky (Figures 1). In addition to the movie studio, TV production and international assets such as Star and Sky, Disney will also add entertainment networks such as FX and National Geographic. Bob Iger highlighted the chance to expand Fox's Avatar franchise particularly considering new theme park lands. In addition to expanding the Marvel Universe via X-Men, Fantastic Four and Deadpool, Disney will obtain Fox's distribution rights to the first Star Wars film. Taking a majority stake in Hulu will further accelerate Disney’s streaming capabilities and compete directly with Netflix (NFLX). Taking majority control of Hulu is going to be beneficial and result in "flowing more content in Hulu's direction," and managing Hulu "becomes a little more clear, a little more effective." Turning to sports, combining Fox’s sports content with Disney’s ESPN will be synergistic and a "perfect complement" to ESPN's offerings, which are national in nature and will benefit from regional focus, Iger says.
Figure 1 – Television, film and direct-to-consumer combination of Disney and Fox with noteworthy asset acquisitions
Streaming and New ESPN Offering:
ESPN has remained at the forefront of investors’ minds, serving as the root cause of this streaming initiative as profits and revenue from the Media Networks division have stalled out over the past few years. Simply put, Disney is going all-in on a Disney branded streaming service come 2019. Although ESPN makes up a disproportionate amount of the company’s revenue and income, all of its other franchises are posting robust growth hence Disney will be relying less on its ESPN franchise over the coming years. Disney’s perpetual stock slump and roller coaster ride over the last 2 years has almost entirely been attributable to the decrease in ESPN subscribers and subsequent revenue slowdown at its Media Networks division.
ESPN streaming service will launch soon and Bob Iger says the company's upcoming sports streaming service from ESPN will cost $4.99/month. It will come with a heavily redesigned app, a "one-app approach," and as planned will feature sports events not available on linear ESPN channels. The new app's "technological guts" will be "completely redone," Iger says, and will focus on three major offerings, Iger says: 1) tons of scores and highlights and news stories about sports, highly personalized; 2) "live streaming of the networks themselves" on an authenticated basis, a la the current Watch ESPN app, "ESPN, ESPN2, ESPNU etc."; 3) ESPN Plus, with "incremental thousands of hours" of programming, including the 30 for 30 library and content made only for the app.
Disney verses Netflix:
Meanwhile, Disney's coming branded app will have less content than Netflix because its content will be more appealing overall, Iger says. Disney might pursue early uptake of 2019's Disney-branded streaming service by pricing it "substantially" cheaper than Netflix. The company is making the right steps with its plans to target evolving media consumers with the two streaming services, JPMorgan's Alexia Quadrani says. The next two fiscal years look good for the film slate as well, she notes, with a pair of Star Wars canon films yet ahead, and another trilogy on the way along with stand-alone films like Solo. Disney’s streaming service will include content from Disney's four major brands (Disney, Pixar, Star Wars/Lucasfilm and Marvel). It will have 4-5 exclusive feature films per year as well as well as original series. Already in development is a Star Wars live-action series, as well as other series based on its Monsters film and High School Musical series. All-in-all, bringing all of Fox’s studio and TV assets into the streaming fold will only add to the formidable challenger that Disney is becoming to Netflix.
Disney said it intends to remove all of its movies from Netflix and instead plans to launch its own streaming service starting in the U.S. and then expanding internationally. Disney opted to exercise an option to migrate its content off the Netflix platform. Movies to be removed include Disney and Pixar titles, according to Iger. Netflix said that Disney movies will be available through the end of 2018 on its platform while Marvel TV shows will remain. The new platform will be the home for all Disney movies going forward, starting with the 2019 theatrical slate which includes "Toy Story 4," "Frozen 2," and the upcoming live-action "The Lion King." It will also be making a "significant investment" in exclusive movies and television series for the new platform.
Earnings and Theme Parks:
Q1 FY2018 earnings were recently released with EPS coming in at $1.89, beating by $0.28 and revenue coming in at $15.35 billion, up 3.9% year-over-year albeit missing estimates by $100 million. Parks & Resorts revenues increased by 13%, and operating income in the segment rose 21%. Overall revenues were up 4% and operating income up 1%. EPS rose 22% to $1.89. Revenue by segment: Media Networks, $6.24B (flat); Parks and resorts, $5.15B (up 13%); Studio Entertainment, $2.5B (down 1%); Consumer Products & Interactive Media, $1.45B (down 2%). Operating income by segment: Media Networks, $1.19B (down 12%); Parks and Resorts, $1.35B (up 21%); Studio Entertainment, $829M (down 2%); Consumer Products & Interactive Media, $617M (down 4%). Collectively, overall growth in revenue and EPS is a positive sign moving into FY2018. Parks and Resorts remain a bright spot and Disney continues to invest and possess pricing power, hence the price hikes at the parks. Toy Story land and Star Wars land are major projects at Disney parks that may further drive revenue growth. A strong movie slate will reinvigorate the Studio Entertainment and Consumer Products & Interactive Media segments while major streaming initiatives are in the works to remediate the Media Networks segment. This confluence may bear fruit as FY2018 matures and initiatives take hold.
FY2018 is off to a great start for Disney growth catalysts in the works via Parks and Resorts, streaming, studio strength, Fox acquisition and tax reform legislation. Disney has been establishing a firm footing in the streaming space via Hulu (30% stake now converting into a majority 60% stake after the Fox acquisition), BAMTech, Sling, ESPN streaming service and a Disney branded service coming in 2019. The studio segment is off to a great start with record breaking movie releases such as Thor: Ragnarok and Star Wars: The Last Jedi, Coco and Blank Panther. Disney is evolving to address the deteriorating Media Networks business segment with major streaming initiatives. Disney has one of its biggest movie slates for FY2018 with Blank Panther, The Avengers: Infinity War and Solo: A Star Wars Story around the corner. Disney also announced that it is acquiring 21st Century Fox’s assets to further drive growth for $52 billion. This acquisition brings in noteworthy studio assets such as more Marvel properties (X-Men, Fantastic 4 and Deadpool) and Avatar along with TV content and regional sports. Disney offers a compelling long-term investment opportunity considering the growth, Fox acquisition, pipeline, Media Networks remediation plan, diversity of its portfolio, tax reform, share repurchase program and dividend growth.
Disclosure: The author holds shares of Disney and is long Disney. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of stockoptionsdad.com a venue created to share investing ideas and strategies with an emphasis on options trading.
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