Disney (DIS) just delivered a stellar quarter beating on both the top and bottom lines while continuing to roll out its growth initiatives.
Disney’s growth rotation is still in its early stages with the remediation of its ESPN property and flurry of growth initiatives to meet modern-day media consumption trends via streaming with its Disney+ property. In the backdrop, the company continues to dominate the box office year after year with a long pipeline of blockbusters in the queue, notably Frozen 2 and Star Wars: The Rise of Skywalker. Additionally, its Parks and Resorts continue to be a growth avenue with tremendous pricing power. Disney is going all-in on the streaming front and will inevitably acquire full ownership of Hulu, and the company is launching its Disney branded streaming service that will compete directly with Netflix (NFLX).
Disney+ launches on November 12th, and Disney is unleashing all of its content (Marvel, Star Wars, Disney, and Pixar), which will be a formidable competitor in the ever-expanding streaming wars. As a result of its strong Q4 numbers, Disney has hit near all-time highs of ~$140 per share. I’ve been behind Disney for a long time, especially through this transition back to growth when the stock traded below $100, and I still feel that the company offers a compelling long-term investment opportunity given its growth catalysts that will continue to bear fruit over the coming years.
Disney’s Stellar Q4 Earnings
Disney’s Q4 earnings easily beat analysts’ expectations with substantial gains in its television networks and film studio by way of its Fox acquisition. Disney beat on both the top-line revenue and bottom-line profit. EPS came in at $1.07, beating by $0.10 per share, and revenue came in at $19.1 billion, beating by $80 million. Revenue grew by 34% year-over-year, and for the fiscal year, revenue was up 17% at $69.57 billion.
Disney’s business across the board came in strong, posting growth in every category. Revenue by segment: Media Networks, $6.51 billion (up 22%); Parks, Experiences and Products, $6.7 billion (up 8%); Studio Entertainment, $3.3 billion (up 52%); Direct-to-Consumer and International, $3.4 billion (up 361%). Operating income by segment: Media Networks, $2.14B (up 7%); Parks, Experiences and Products, $1.7B (up 4%); Studio Entertainment, $792M (up 13%); Direct-to-Consumer and International, -$553M.
“Our solid results in the fourth quarter reflect the ongoing strength of our brands and businesses,” “We’ve spent the last few years completely transforming The Walt Disney Company to focus the resources and immense creativity across the entire company on delivering an extraordinary direct-to-consumer experience, and we’re excited for the launch of Disney+ on November 12”.
- Bob Iger, CEO
Disney’s Box Office Dominance
Q4 is underway and there are two blockbusters coming into the fold with Frozen 2 and Star Wars: The Rise of Skywalker. In the last four years at the box office, Disney has dominated with its properties that include Pixar, Marvel, Star Wars and Disney. The company has released dozens of $1 billion-plus worldwide films across its franchises. Thus far, in 2019, Disney has released six movies that have grossed over $1 billion at the global box office (Captain Marvel, Avengers: Endgame, Lion King, Aladdin, Spider-Man: Far From Home and Toy Story 4). It’s noteworthy to highlight Avengers: Endgame, which has taken the crown from Avatar for the highest-grossing movie of all-time, bringing in $2.797 billion worldwide. Disney already has a half dozen films that have eclipsed the $1 billion mark, and it’s highly likely that this number will increase with Frozen 2 and Star Wars Episode 9 coming out later this year. 2019 will cap off a four year run of being the number one studio in terms of box office gross.
In 2016, 2017 and 2018, Disney’s studio captured 26.3%, 21.8%, and 26% of the market share, respectively, based on domestic box office gross. Disney’s studio is also the fastest to reach $1 billion in domestic box office gross and holds the three top fastest times. In 2016, 2017, and 2018 Disney achieved this mark in 128, 146, and 117 days, respectively which are the three fastest on record. In 2018, Disney’s studio was the fastest ever to $1 billion in box office gross (117 days). Their rich pipeline of movie content will likely extend this streak into 2020 and beyond.
Disney’s Comprehensive Streaming Efforts (Hulu, Disney+ and ESPN)
Hulu will finally be a wholly-owned asset now that Comcast has agreed to sell its stake in Hulu in five years (2024). Disney has taken full operational control of Hulu, and Comcast has given up it's voting rights as well. Taken together, Disney will take total control of the streaming service, after it bought out Fox's share while WarnerMedia sold its 10% back to Hulu, leaving Comcast as the only non-Disney owner. Comcast could sell its remaining stake at a total-company valuation of $27.5B or whatever Hulu is appraised at in five years. Comcast is guaranteed $5.8 billion for its Hulu stake.
“Hulu represents the best of television, with its incredible array of award-winning original content, a rich library of popular series and movies, and live TV offerings,” Disney CEO Bob Iger said in a statement. “We are now able to completely integrate Hulu into our direct-to-consumer business and leverage the full power of The Walt Disney Company’s brands and creative engines to make the service even more compelling and a greater value for consumers.”
Disney’s future of streaming includes ESPN Plus, which was launched in 2018 to a mixed skeptical reception among shareholders and consumers upon its debut. Due to precipitous declines in ESPN viewership via traditional cable, Disney was cornered to remediate its ESPN business and evolve to the cord-cutting consumer. Recently, Disney announced a key milestone for its streaming platform, reaching over 2 million paid subscribers.
Consumers are now experiencing Disney's stand-alone streaming service (November 12th), Disney+, which includes Pixar, Marvel, Disney, Lucasfilm, and National Geographic content. Collectively, Disney’s streaming initiatives are bearing fruit, and as Bob Iger stated in a recent interview, its streaming efforts are a marathon, not a sprint. These streaming properties will add a layer of durable, recurring revenue for the company for years to come while addressing the cord-cutting and ESPN losses.
All the initiatives that Disney has taken over the previous few years to remediate its business and restore growth appear to be coming to fruition via its Fox acquisition and its streaming initiatives. Disney continues to invest heavily in its streaming services (Hulu, ESPN Plus and its Disney+ streaming service) to propel its growth and presence within the streaming space. The company is evolving to meet the new age of media consumption demands of the modern consumer via streaming and on-demand content. Streaming initiatives via Hulu, ESPN Plus, and Disney+ will continue to be major growth catalysts moving forward. Disney’s business transformation and the realization of these new financial benefits are evident in its Q4 earnings. Disney offers a compelling long-term investment opportunity for the long-term investor as the long term story remains intact.
Disclosure: The author does not hold shares in any of the mentioned stocks or ETFs. However, he may engage in options trading in any of the underlying securities. 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 www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.