Disney: Advertising Revenues Stronger Than Expected

By Wall St. Speaks Out Archives
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Wall St. Speaks Out on Disney's Impressive Ad Growth - Brian Wieser, Pivotal Research

BOTTOM LINE: We continue to rate Disney Hold, now with a $110 YE2016 price target vs. $106 previously. Disney reported fiscal year 4Q15 results for the fourteen weeks ending Oct. 3 2015 last week. Total revenue was up by +9.1%, one of the best company-wide results of the past several years with similarly strong operating income margins of +23.9% (vs. levels below 20% for all other third quarters we have tracked). Adjusted earnings per share were $1.20, slightly ahead of our $1.17 forecast.

There were two particularly positive stand-out considerations for us from Disney's fiscal fourth quarter earnings results. First, advertising at ESPN was up by +5% year-over-year, representing +9% underlying growth on a thirteen-week-to-thirteen-week basis, excluding World Cup related revenue in the year-ago period (including it, we estimate ad growth was likely down by a couple of percentage points). At ABC, ad revenue growth was up by "mid-teens", or mid-single digits on a thirteen-week basis, which is ultimately the more impressive number. Commentary regarding the fiscal first quarter of 2016 suggested more growth to come at the broadcast network and especially at the cable networks. College football games which are last year aired in the fiscal second quarter will be running in the first quarter instead, adding incremental revenue growth in the 'teens to the network.

One other key set of commentary for the segment related to the scale of the company's digital activities. Disney management noted that in September alone, consumers spent 10.3 billion minutes with ESPN digital properties. For a point of comparison, we can contrast this with the approximately 57.4 billion minutes that were spent by people on domestic ESPN properties via traditional television, according to our analysis of data from Nielsen. With approximately 1/6th of the total potential inventory in digital media vs. television, ESPN's digital inventory is significant in both absolute and relative terms.

Consumer Products was the other area of note during the most recent quarter, with revenue growth up by 11.5% despite the exclusion of revenue recognition associated with the launch of new Star Wars-related products on "Force Friday." This should cause a meaningful incremental bump up in reported revenue and margins for the fiscal first quarter of 2016. More important than consumer products of course, the biggest wild card for the next quarter is the degree to which the next Star Wars film drives the coming quarter's growth.

Our estimates for fiscal 2016 have been revised upwards somewhat, with revenue expectations now set at +8.9%. We expect margins to be down slightly to 25.6% from 26.4% in the 2015 fiscal year, with compression due to foreign exchange and the opening of the Shanghai theme park. We forecast earnings per share of $5.88 (or $5.92 for the calendar year) on an as-reported basis.

VALUATION. We value DIS with a DCF, using a 7.4% near-term discount rate (10.9% long-term), the lowest among its peer group and long-term growth of 5.25%, the highest among its peer group.

RISKS to Walt Disney include the hit-driven nature of video content production, perceptions around the "death" of TV advertising and risks around slow-downs in the pay TV business.


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