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February 09, 2014

Disney All Good with More to Come

Disney (DIS) reported better than expected first quarter results with all divisions except ABC performing ahead of Wall Street estimates. EPS of $1.04 exceeded street consensus of 91 cents with over half the beat coming from operating factors. DIS faces a few quarters of tougher comparisons and slower growth but investor sentiment should stay very positive as focus shifts to FY15 and FY16 when a strong lineup of films and the opening of Shanghai Disneyland should accelerate growth. DIS should earn over $4.00 this year, rising toward $5.50 in 2016. I think the shares can reach $90 by yearend based on 20x 2015 estimated EPS of $4.60. This would put DIS at a small premium to its peer group and the market but given operating momentum and an underleveraged balance sheet and accelerated share repurchase program, a premium multiple is warranted.

In its latest quarter, DIS reported 7% revenue growth and 27% operating income growth. Good news all over led by (1) EPSN advertising growth of 10%, (2) theme park margins, and (3) initial benefits from the massive success of Frozen. Consumer products were helped by Frozen and the long lagging and money losing Interactive unit finally is reporting good profits following the successful introduction of the Infinity game. The only poor performing unit is ABC where poor ratings are pressuring advertising growth.

Looking ahead, Disney will open the Shanghai theme park in 2015 and have new movie releases from the Avengers and Star Wars franchise and a new Pixar film after a year off. ESPN faces a pickup in sports rights fees in the second half of calendar 2014 but once those reset, operating income should benefit as the major new contracts signed last year with most of the top cable and satellite companies allow affiliate fees to grow in the high single digits.

The next few quarters are unlikely to show the upside surprise witnessed in the latest quarter but the positive sentiment off the latest quarter should carry the company given the big potential in 2015 and 2016. It is rare to find big blue chip stocks with above average growth potential and accelerating operating momentum. DIS is well loved by investors and seems like a perfect core holding in a still sluggish US and global economy.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. DIS is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at February 9, 2014 06:10 PM in DIS