Shares of The Walt Disney Company (DIS) enjoyed a 3.4% increase on the index after the media giant posted outstanding first-quarter fiscal 2014 results after the closing bell yesterday. The company’s adjusted earnings came in at $1.04 per share, beating the Zacks Consensus Estimate of 91 cents and surging 32% year over year.
Including one-time items, earnings were $1.03 per share, up nearly 34% from the prior-year quarter.
Results were propelled by double-digit revenue growth across Studio Entertainment, Consumer Products as well as Interactive businesses.
Revenues came in at $12,309 million, up 9% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $12,279 million. Total segment operating income increased 27% to $3,020 million, based on strong performance across all divisions, particularly Studio Entertainment and Interactive segments.
A day before, one of its peers, Time Warner Inc. (TWX) reported fourth-quarter 2013 earnings of $1.17 per share that surpassed the Zacks Consensus Estimate by a couple of cents and came a penny ahead of the prior-year quarter figure. The beat was aided by strength across Turner, Home Box Office and Warner Bros., along with lower shares outstanding.
Segment Details
Media Networks revenues increased 4% year over year to $5,290 million attributable to 6% rise in Cable Networks revenues to $3,579 million, partly offset 2% fall in Broadcasting revenues to $1,531 million during the quarter.
The segment’s operating income increased 20% to $1,455 million owing to an increase of 34% in Cable Networks operating income to $1,277 million, which reflected growth at ESPN and increased equity income from A&E Television Networks (AETN).
However, Broadcasting operating income fell 32% to $178 million owing to increased programming costs and decline in program sales as well as advertising revenues. These were partly offset by increased affiliate revenues and lower general and administrative expenses.
Parks and Resorts revenues rose 6% to $3,597 million, while the segment’s operating income increased 16% to $671 million. Growth was due to record footfall at Walt Disney World, Hong Kong Disneyland and Tokyo Disney Resort.
In the quarter, per capita spending in the Parks grew 8% on increased ticket prices and food and beverage spending. Management stated that so far in the second quarter of fiscal 2014, domestic resort reservations have risen 7% year over year, while booked rates are up 2%.
Management expects operating income to fall by $45 million in the second quarter as the shift of one week will place the Easter holiday entirely in the third quarter.
Studio Entertainment revenues rose 23% to $1,893 million, while operating income registered a 75% rise to $409 million. The improvement was driven by stupendous success of the animated film “Frozen” that alone raked in more than $870 million at the world box office. Notably, it has recently released in China and is yet to be released in Japan. Further, Marvel’s Thor: The Dark World and Walt Disney Studio's Saving Mr. Banks were two other major releases in the quarter.
Disney anticipates momentum in the segment to continue in the quarters ahead as its boasts a strong pipeline of movies including Muppets Most Wanted, Maleficent , Tommorowland and Captain America. Star Wars Episode VII, Disney’s most ambitious project in recent times, is slated to release on Dec 18, 2015.
Consumer Products revenues increased 11% to $1,126 million, while segment operating income rose 24% to $430 million, owing to gains from Merchandise Licensing and the retail business.
Interactive revenues for the quarter rose 38% to $403 million, while operating profit was $55 million, up nearly five times from the prior-year quarter. The increment was on the back of rise in console game sales (especially propelled by success of Disney Infinity) and the growing Japan mobile business.
Management expects Interactive revenues to be somewhat volatile and dependent on the timing of important game releases. The segment is likely to report operating loss in the second quarter, almost same as the loss reported in the year-ago period.
Other Financial Details
During the quarter, Disney generated free cash flow of $554 million, down 8% year over year. The company ended the quarter with cash and cash equivalents of $4,397 million, borrowings of $11,714 million and shareholders’ equity of $44,324 million, excluding non-controlling interest of $2,972 million.
Strong cash flow generation positions the company favorably to enhance shareholders’ value through share repurchases. In the reported quarter, Disney bought back 25.3 million shares for approximately $1.7 million. Year to date, it repurchased 33.7 million shares worth approximately $2.3 billion.
Capital expenditure during the quarter increased 20.7% to $658 million mainly due to higher construction costs for Shanghai Disney Resort.
Our Take
Walt Disney is one of the world's major diversified entertainment companies. Moreover, the company commands a formidable portfolio of globally recognized brands, which endow a strong competitive advantage and strengthens its well-established position in the market.
Moreover, Disney has entered into several content distribution agreements with companies such as Comcast and Netflix, Inc. (NFLX), which enhance its multi-channel subscription model by increasing the number of platforms to deliver content.
We believe that barring the near-term headwinds, the company remains well positioned to sustain its robust performance on the back of Parks and Resorts, as well as the Studio and Media Networks divisions.
Currently, Disney carries a Zacks Rank #2 (Buy). Another better-ranked media stock worth a look is Liberty Media Corporation (LMCA) with a Zacks Rank #1 (Strong Buy).
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