Disney Misses, but We Stand By Our Fair Value Estimate

Disney DIS posted a weak fiscal 2019 third quarter as both revenue and operating income fell short of consensus expectations. The firm consolidated both Fox Entertainment assets and Hulu in the quarter as it prepares for the transformational leap into direct to consumer with the launch of Disney+ in November. Management maintained its aggressive positioning in the DTC space by announcing a $12.99 bundle of Disney+, the ad-supported tier of Hulu, and ESPN+. We maintain our wide moat rating and our fair value estimate of $130.

Revenue for the third quarter was up 33% year over year to $20.2 billion, reflecting the Fox acquisition. The media networks segment grew 21% year over year as affiliate fee revenue was up 20% in the quarter as the 16% growth from Fox and 8% from higher rates more than offset the 2.5% decline in subscribers and the 1% negative impact of the new revenue recognition standard. Advertising revenue at broadcast networks was down over 4% as higher pricing was more than offset by lower impressions due to ratings. Ad revenue at the cable networks improved by 29% due to the Fox consolidation (18%), higher rates (6%), and more impressions (5%) as there were two more NBA Finals games this quarter.

The parks, experiences & consumer products segment remains a key growth driver with 7% year-over-year growth. Versus last year, total domestic attendance fell 3% but per capita spending grew by 10% and per room spending improved by 3%. Part of attendance decline was attributed to lower annual pass visits at Disneyland as the opening of new Star Wars land may have scared off some more regular customers. Revenue at the studio improved 33% as the slate in the quarter overcame a difficult comp at the box office and the Fox studio assets and slate were added in. Segment operating margin for the firm fell to 19.6% from 27.5% as the revenue growth was more than offset by the increased programming costs, continued investment in DTC, and consolidation of the Hulu losses.