Earnings At Disney Soar, But Key Metrics Remain Muted; Long-Term Questions Remain

(CTN News) – Disney’s Morningstar Metrics,

• Estimated fair market value: $150

• Five-star rating from Morningstar

• A wide economic moat is assigned by Morningstar

• The Morningstar Uncertainty Rating is high

Our thoughts on Disney’s earnings

We believe that Disney’s DIS fiscal fourth quarter demonstrated the firm’s financial strength and why its shares remain undervalued in spite of its challenges. In particular, the firm has significantly reduced costs, resulting in a dramatic increase in free cash flow. The television industry continues to face challenges, and despite the headline-grabbing 7 million streaming subscriber additions, domestic growth was only minimal.

The market is too pessimistic to accept Disney’s ability to funnel its declining linear business directly into its direct-to-consumer streaming offerings, but with such valuable franchises and levers to pull, we feel the market is overly optimistic. The fair value estimate of $145 remains unchanged.

Profits and free cash flow were the highlights of the quarter, according to our analysis. The total segment’s operating income increased by 86% over last year, led primarily by the experiences segment and a $1 billion improvement in direct-to-consumer losses. Streaming services are expected to reach profitability in the fourth quarter of fiscal 2024, according to the firm.

Approximately $7.5 billion in annual cost reductions are expected by 2024 across the entire Disney organization. Although the firm plans to increase its capital expenditures by approximately $1 billion, it expects to generate free cash flow of $8 billion in 2024, an increase from about $5 billion in 2023.

Disney’s subscriber growth is driven by international growth

In addition to the experiences, sales growth did not appear to be compelling. During the fourth quarter of 2011, entertainment revenue increased 2% year over year, with 12% growth in direct-to-consumer sales more than offsetting a 9% decline in linear network sales and a slight decline in content sales and licensing.

Similarly to their peers, linear networks had a weak advertising performance. However, affiliate revenue was also down despite higher rates, and we do not anticipate significant improvements in either of these revenue streams as long as pay-TV subscribers and linear viewership continue to decline.

In DTC, sales growth was almost entirely driven by an increase in international subscribers, since average revenue per subscriber was little changed across all services, and subscriber numbers for domestic Disney+ have been flat.

In a year in which Disney+ added almost 10 million subscribers, Disney+ added 500,000 domestic subscribers and nearly 6.5 million international subscribers during the quarter.

Now that Disney+ will own 100% of Hulu, the company plans to merge the Disney+ and Hulu apps. Both subscribers and monetization are expected to increase significantly as ESPN is added to DTC offerings.

Sports revenue remained relatively flat over the past year, which is encouraging considering the challenges linear networks face. ESPN’s 1% growth was entirely due to ESPN+, which added 800,000 subscribers in the quarter and almost 2 million over the past year.

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