Raising Disney’s Fair Value Ahead of Star Wars, Shanghai Resort

Third-quarter revenue grew 5% over last year to $13.1 billion, in line with our estimate. The revenue growth occurred at all four of largest segments (media networks, studio entertainment, parks and resorts, and consumer products) as studio entertainment benefited from the second Avengers movie and Cinderella, which offset the tough comp of Captain America and Frozen a year ago. EBITDA increased 4% to $4.3 billion, slightly above our $4.2 billion estimate, as margins improved at three of four largest segments (studio entertainment, parks and resorts, and consumer products). EBITDA margin at media networks declined 20 basis points due to the impact of increased sport rights at ESPN. Consolidated adjusted operating income grew 8% year over year to $4.0 billion with a 30.2% margin.

Given the increased investor focus on ESPN due to recent media report concerning sub losses and talent drain, management understandably spent time on the call defending the channel and its value within the changing media landscape. CEO Bob Iger began by pointing out that 83% of pay-TV households turned to ESPN in the first three months of the year and that the channel has license agreements with NFL, NBA, and MLB beyond 2020. He noted that sub losses recently discussed in the media were overblown. Management also continued to defend the value of the multichannel bundles. While we share the concerns around cord-cutting, we note that 96% of sports viewing is done live, providing some defense to the linear channel. Also, ESPN’s broad multimedia presence and sport rights portfolio would allow the firm to offer an unbeatable OTT offering if necessary.

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