Disney Earnings: No Big Surprises in Solid Results; Areas of Ostensible Weakness Aren’t of Concern

Key Morningstar Metrics for Walt Disney

• Fair Value Estimate: $120.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Walt Disney’s DIS 5% year-over-year revenue growth and a 9% decline in operating income were driven by strong results in the areas most critical to the firm’s future: experiences, streaming, and sports. Entertainment profit outside streaming declined 55%, and negative free cash flow was mostly due to timing.

Why it matters: Linear networks and theatrical films account for most other entertainment and have little bearing on our view. Most importantly, experiences growth remains healthy, sports remains stable, and streaming margins continue to expand alongside growing sales.

• Experiences sales grew 6% year over year, while operating margin held at 33% despite incurring costs for attractions that should accelerate sales growth next quarter and beyond. The segment accounted for 72% of operating profit.
• Streaming sales grew 11% year over year, as operating margin expanded to 8% from 5% a year ago. Sports sales grew 1%, while the operating margin contracted 1 percentage point to 4% in the seasonally less-profitable fiscal first quarter.

The bottom line: We maintain our forecast and $120 per share fair value estimate. We believe Disney has a wide moat and an outlook for solid long-term growth, but near-term results have downside risk.

• Management cited international tourism headwinds at domestic parks in guiding to only modest fiscal second-quarter experiences in operating profit. We’ve built this and other economic risk into our experiences forecast since last year, but we’d expect a continued stock selloff on further weakness.
• We expect accelerating experiences sales and operating profit growth in the longer term. Disney will launch another cruise ship in March, and it is expanding at all its parks.

Between the lines: For the first time, Disney did not disclose the number of streaming subscribers it has or sales and operating profit from linear networks and content licensing, making it difficult to dissect what fueled the decline in entertainment operating profit outside of streaming.