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FAT PROPHETS: Walt Disney (NYSE: DIS, initial buy $48.60) shares rose over 2% in Friday’s trading in the wake of announcing 4Q15 results, brushing aside the malaise in the sector following Time Warner’s recent earnings announcement.
We took advantage of the sell-off in the media sector in August/ September to establish a position in the House of Mouse in the Global Opportunities Fund and pleasingly the shares have bounced back strongly, now trading only 5% or so shy of their all-time high attained earlier this year. The shares have also trounced the broader market over the past twelve months, rising 28%.
Disney’s 4Q15 numbers overall reflected a healthy business capping off a fifth consecutive record year. Revenue for the quarter ended 3 October 2015 increased 9% year on year to $13.51 billion and for the full year revenue the entertainment titan posted record revenue of $52.46 billion, up 7% year on year. The Media Networks, Parks and Resorts (high attendance) and Consumer Products (Frozen still going strong) segments drove the revenue increases in both the fourth quarter and for the full year.
Besides record revenue for the full year, Disney posted its highest net income and adjusted earnings per share figures in its corporate history.
Revenue for the fourth quarter missed expectations by a whisker, but this was quite likely due to an accounting quirk that doesn’t allow the company to book revenue from the sales of toys for The Force Awakens until it debuts in cinemas, December 18, a date that can’t come soon enough for the millions of Star Wars fans around the globe. That revenue will be pushed out into the company’s current quarter, making it look like a home run in the making.
Net income in the fourth quarter of $1,609 million represented a 7% year on year increase, while for the full year, net income of $8.38 billion was 12% higher than the previous year. Diluted earnings per share of $0.95 in 4Q15 was 10% higher than in the year ago quarter, but after excluding the negative impact of an asset write-off (Euro Disney) and other one-off items, EPS surged 35% year on year to $1.20. This was a few cents above expectations of $1.17. For the full year, EPS per diluted share of $4.90 was 15% higher than in FY14 and adjusted EPS was 19% higher year on year.
Free cash flow remained solid, with $6.64 billion in FY15, up slightly (+3%) on the prior year.
The positive share price action following the results can in part be attributed to a set of numbers from the cable business that allayed some fears that the sky is falling. Cable Networks (think ESPN) represents the lion’s share of the Media Networks segment, itself responsible for over 44% of total revenue in FY15 and is closely scrutinised each reporting period.
Cable Networks finished the fiscal year on a high note, with revenues increasing 12% to $4,245 million and 10% to $16.58 billion for the full year. It had a strong quarter in 4Q15 in terms of profitability, up 30% and this helped it lift operating income for the full year 5% to $6,787 million. ESPN benefitted from higher affiliate and advertising revenues in 4Q15, partly offset by the usual increase in programming costs.
As shown in the table above, the broader Media Networks segment posted 10% higher revenues in FY15 to $23.26 billion and a 6% increase in segment operating income to $7.79 billion. So all in all, hardly the apocalyptic scenario many commentators have espoused.
We also expect Disney to continue reducing its reliance on ESPN going forward, with its franchise strategy the strongest in the industry in our view. In the near term, Frozen merchandise will be powerfully supported Star Wars toys this fiscal year at least and likely many more and the opening of the Shanghai Disney park will bulk up the Parks and Resorts segment further.
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