The Walt Disney Co. (DIS, Financial) is slated to release its second quarter results on May 5. The company, which competes with Twenty-First Century Fox Inc. (FOXA, Financial) and Times Warner Inc. (TWX, Financial) in the diversified entertainment industry, distributes films under the Walt Disney Pictures, Marvel, Lucasfilm, Pixar and Touchstone banners. The company also runs the ESPN and ABC media networks, the Disney Cruise Line and the Disney-branded parks and resorts in California and Florida. Walt Disney is also a Dow Jones Industrial Average member and its results could influence broader market gauges.
Previous quarter recap
The media and entertainment giant posted strong first quarter results for fiscal 2015 with a 23% year-over-year jump in EPS to $1.37 per diluted share, beating the consensus estimate of $1.07 a share. Net income increased from $1.84 billion in Q1 2014 to $2.18 billion in Q1 2015, while revenues for the quarter came in at $13.39 billion compared to the year-ago figure of $12.31 billion, with the company witnessing growth across all operating segments. Although Studio Entertainment revenues for the quarter decreased 2% to $1.9 billion, Home Entertainment drove up the segment operating income by 33% year-over-year to $544 million. Further, although the theatrical release of Big Hero 6 failed to create the same magic as the year-ago quarter’s release of Frozen, the movie did manage to rake in substantial revenues, generating just under $500 million in global box office. Shares of Walt Disney Co. are up 11.2% since the company’s last earnings release.
Success of Cinderella, Avengers Likely to Spur Revenues
While Walt Disney might find its performance in the year-ago quarter a hard act to follow, the company still has a number of things going in its favor. While a sequel to the highly successful Frozen has been announced, Walt Disney continues to reap the rewards of the initial installment even after a year and half after its theatrical release. DVD sales, theme park attractions and merchandising continue to drive revenues from Frozen. At the same time, Walt Disney also had a significant movie releases during the second quarter. Cinderella, which was released in March 2015, has already performed substantially well at the box office with $259 million in global gross as of March 24. The movie is looked upon as an important franchise for the company. Disney’s other release under the Marvel banner - Avengers: Age of Ultron is also likely to spur revenue in the second quarter. The movie grossed $201 million in its opening week, quite good considering it was made at a production cost of $250 million.
Walt Disney also puts significant efforts to ensure that the success of its big-screen hits trickle down to profits through DVD and cable rights sales, themed attractions at its Parks and Resorts, movie-related merchandise and its interactive gaming segment that boasts a massive multi-player online game – Disney Infinity. Consequently, the box-office performance of both Cinderella and Avengers is likely to set the ball rolling for the company for the forthcoming months.
With the company is seeing a slowdown at its Media Networks segment owing primarily to the weak performance of ESPN, rising programming costs and currency headwinds are likely to drag down revenues. However, the segment still makes up more than a third of Walt Disney’s operating profit. While this is seen as a risk by a section of experts given the current shift in the industry towards online content streaming, Walt Disney’s recent deal with Dish Network’s Sling TV is likely to ensure a profitable transition to the future.
Further, investors will be particularly pleased with Walt Disney’s effort to regularly return at least 20% of its generated cash to shareholders through share buybacks and dividends. For instance, during the first quarter, Walt Disney repurchased 15 million shares for around $1.3 billion and increased dividend by 34% from $0.86 a share to $1.15 a share.
Final Thoughts
Walt Disney posted better-than-expected first quarter earnings, with revenue growth across all operating segments. While the company has beaten earnings expectations by 11c to 20c in three of the last four quarters, Walt Disney’s net income has been growing for three straight quarters. However, while consensus estimates peg the company’s earnings at $1.11 a share, up from $1.10 three months ago, on revenues of $12.52 billion for the quarter, Walt Disney probably needs to post non-GAAP earnings of at least $1.17 a share for a favourable reaction from investors. Walt Disney shares have mostly traded in the $98-$110 range in the last three months, hitting a 52-week high of $111.66 on April 27 in the run-up to the earnings report. The Walt Disney stock carries a price estimate of $110.15 a share, which is a tad lower than its current price, and ‘buy’ guidance.
