Disney Rebounds On a Stronger-Than-Expected Quarter for Its Media Networks, ESPN Included - Anthony DiClemente, Nomura Securities
Disney's results were ahead of expectations, as adj. EPS of $1.20, (+35% YoY) beat our estimate by $0.05. Media networks were a positive highlight, as segment operating income was driven by strength at ESPN. The beat came despite the fact that much Star Wars-related consumer products revenue will not be realized until the movie is released in December. Disney reaffirmed its 3-year Cable Networks guidance. For FY16 EPS, we believe favorable trends at the Studio and CP segments more than offset Shanghai launch costs, SVOD compares, and Hulu losses. Our FY16 EPS goes to $5.53, from $5.50. This implies a healthy 7% EPS growth for Disney after a fiscal year in which it grew EPS 19% YoY. We maintain our 21x target EPS multiple for Disney, reasonable relative to the S&P 500 and other consumer discretionary stocks.
*Studio OI more than doubles in 4Q, setting stage for further growth. Driven mainly by cost improvements and lower content amortization, Studio segment F4Q OI was significantly higher than our estimates. We are modelling material upside in Q1 given the 12/18/15 release of Star Wars.
*Taking up our Consumer Products estimates. Importantly, because of an accounting rule that doesn't call for some merchandise to be recognized until after the film is released, there was no Star Wars-related licensing revenue in the quarter. With Star Wars 6 weeks away, management alluded to huge global demand for Star Wars-related merchandise.
*ESPN affiliate growth, ad sales above our estimates and pacing up nicely. DIS reported upside to cable networks revenue, which grew 12% in F4Q15, driven by recurring growth of +9% in ad sales and recurring affiliate fee growth of +8%. Media Networks segment OI growth of +27% YoY may be comforting to those who are anxious about the traditional TV ecosystem. Cable networks 3-year operating income guidance was unchanged.
*Parks OI slightly below our estimate; trends strong but planning for bigger launch costs in FY16. Given the extra week of operations, we were surprised Disney OI results were slightly below in the quarter. US resort reservations are pacing up 5% compared to prior year levels.
*FCF strong, funding capex increases for new Parks projects. FCF of $2.1bn for the quarter was up 4% YoY. Disney dramatically increased capex expectation as +$800mn; this implies new capex guidance of ~$5bn, well ahead of expectations heading into the call. In terms of the buyback plan for next year, Disney reiterated its plan for $6bn-$8bn of shareholder returns.
*Maintaining $121 TP. We maintain our constructive view on Disney shares given the IP monetization potential across all its segments. Our $121 TP is based on 21x our CY16 EPS estimate of $5.71.
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