ii view: Disney film and streaming success darkened by parks outlook

Third-quarter results to 29 June

• Revenue up 4% to $23.15 billion
• Operating income up 19% to $4.23 billion
• Adjusted earnings per share up 35% to $1.39

Chief executive Bob Iger said:

“Our performance in Q3 demonstrates the progress we’ve made against our four strategic priorities across our creative studios, streaming, sports, and Experiences businesses. This was a strong quarter for Disney, driven by excellent results in our Entertainment segment both at the box office and in DTC. 

“We are confident in our ability to continue driving earnings growth through our collection of unique and powerful assets.”

• Invest with ii: Buy US Stocks from UK | Most-traded US Stocks | Cashback Offers

ii round-up:

Entertainment giant The Walt Disney Co (NYSE:DIS) has detailed strength at its Entertainment film business but warned of expected weak demand at its Experience theme parks division.

Success for films like Inside Out 2 and Planet of the Apes, as well a move into profit for the wider Direct-to-Consumer business that includes Disney Plus and ESPN+, helped third-quarter adjusted earnings rise 35% year-over-year to $1.39 per share - ahead of analyst forecasts of $1.19 per share. Accompanying outlook comments, however, pointed towards likely demand weakness for US theme parks over coming quarters following the moderation seen this quarter. 

Shares in the Dow Jones constituent fell 3% in post results trading having come into these latest numbers down around 5% year-to-date. That’s in contrast to a one-quarter increase for Netflix Inc (NASDAQ:NFLX) shares, while the Dow index itself is up close to 3% in 2024. 

Group-wide quarterly revenue improved 4% from a year ago to $23.15 billion, driven by gains across all three divisions - Entertainment, Experience and Sports – and aided by price increases. Wall Street had expected sales of $23.07 billion.

Profit at Entertainment more than doubled to $1.2 billion, with film content sales swinging to a profit of $254 million from last year’s loss of $112 million. Price increases pushed the average monthly revenue per paid subscriber for its Disney Plus overseas business to $6.78 from $6.66. 

Profit from Experiences declined by 3% year-over-year to $2.22 billion, hindered by increased costs and inflation as well as weaker end-of-quarter demand. Sports divisional profit fell 6% to $802 million, hit by higher costs following a change in the timing of cricket at its Star India business. 

Broker Morgan Stanley reiterated its ‘overweight’ stance post the results, flagging that Disney shares trade near a 20-year low relative to the S&P 500 index.  

ii view:

Established in 1923 by brothers Walt and Roy, Disney today employs over 190,000 people. Group brands include Pixar, Marvell Studios, Lucasfilm, ABC News, Hulu and Entertainment and Sports Programming Network or ESPN. The Entertainment division accounted for its biggest chunk of sales during this latest quarter at 46%, followed by Experience at 36% and Sports the balance of 18%. 

Management goals include achieving sustained profitability at its streaming business, building ESPN into the preeminent digital sports platform, and improving the output and economics of its film studios. 

For investors, elevated borrowing costs continue to squeeze the disposable income of its customers. Intense competition across the streaming sector, including competition from Netflix, Amazon.com Inc (NASDAQ:AMZN) Prime and Apple Inc (NASDAQ:AAPL), cannot be overlooked. Costs for businesses generally remain elevated, reigniting creative flare for its film studios and leaning less on sequels remains a work in progress, while a return to the previous head Bob Iger still leaves questions and uncertainty over likely future leadership.  

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• Top tech investor: ‘Big Five’ stock concentration risk is justified
• Where to invest in Q3 2024? Four experts have their say

More favourably, diversity of operations regularly sees positives for one division countering challenges for another. Ongoing exposure to sports content remains invaluable given its ability to generate large audiences. Costs remain a high focus for management, while a forecast dividend yield of close to 1% compares to no dividend at Netflix. 

A diverse range of operations and consensus analyst fair value estimate above $120 per share are likely to keep fans of this iconic entertainment brand interested. However, predicted headwinds and a failure to make any share price recovery stick will be a concern for others.  

Positives: 

• Geographical diversity, strong brands, and media content bank
• Focus on costs

Negatives:

• Cost pressured consumers may cut entertainment spending
• Intense competition

The average rating of stock market analysts:

Buy