Walt Disney Co – Published 10/04/18

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Company Overview:

Disney (Walt Disney Co DIS U.S.: NYSE) is out to join the new technology giants in streaming entertainment content and this has led Bob Iger, the CEO, to reorganise the company recently. A new business unit, Direct-to-Consumer and International Business will replace the previous consumer products, parks and resorts groups. The new unit will run the streaming services Disney is bringing on line.

The company has already taken a 60% stake in Hulu and now intends to buy Twenty-First Century Fox, so Kevin Mayer, chief strategy officer, will have to integrate the new businesses and get them aligned in the new structure. Disney is so keen to see this deal go through, it has even offered to take on the loss-making Sky News from the Murdochs.

Even though the company has a hefty market capitalisation of $158bn, Disney has had to respond to the threat posed by Netflix. The company was previously delivering content by cable TV. As customers switched to Netflix, Disney was out of the loop. So it’s had to move to a 21st century delivery model with a corporate structure to match.

Trading update

The February 2018 earnings report, showed earnings slightly higher than estimates but there was a somewhat disappointing revenue performance. The earnings were boosted by $1.6bn from President Trump’s tax changes. Revenue was $15.35bn, an improvement of 4% over the same quarter in the previous year. This was lower than the $15.5bn that analysts had forecast. Net income was 78% higher, at $4.4bn.

Resorts and parks performed reasonably, with a rise in revenue of 13% over the same period last year. However, revenue from consumer products, studios and the media networks declined slightly. So what caused the decline? Chiefly it was down to higher costs, lower advertising rates and less income from selling content. All symptoms of the move to streaming, that Disney is now addressing with its content acquisitions. The trading update shows how vital it is that this new strategy succeeds. The old model is simply not sustainable.

Earnings and dividends

The October to December 2017 update showed earnings per share of $1.89, better than the predicted $1.61, due to those tax changes. The share price rose slightly on the news – up 2.5%.

Disney’s half year cash dividend, announced in December 2017 was $0.84 per share, up from the previous $0.78, declared the previous July. That’s a total of $1.62 for the last year. Currently on a p/e of around 17, the p/e is forecast to decline over the next couple of years, to around 12.6 in 2020. It’s pretty remarkable, given the crazy valuations in the tech media sector. And the dividend cover is approximately 5. Paying a dividend at all is unusual in this sector, as companies put all their earnings into growth.

The Disney deal to buy the Murdoch assets will cost $52.4bn and involve taking on $14bn in debt. This has worried some investors who feel the company is too highly geared. However, others point to the cash generation potential of the investments and feel that this offsets any possible risks from the company’s debt levels. The share price hasn’t really risen for the last six months because of the uncertainty.

Disney now has the chance to capitalise on some of the Fox content it has acquired. X-Men, Avatar, Titanic, The Simpsons and Planet of the Apes are all franchises that can be exploited across the range of content, products and themed attractions at the parks.