Disney's Growth Story Not on Ice

 Walt Disney (DIS) is on its way to meeting our full-year top- and bottom-line estimates after posting solid gains in its fiscal first quarter. While there were several areas of notable near-term strength during the quarter, we are quick to gravitate back to Disney's cornerstone franchises and world-class brand, which set the stage for long-term growth potential. We expect to increase our fair value estimate by approximately 10% for the time value of money; our wide economic moat rating remains intact.

Consolidated revenue rose 9% to $12.3 billion while operating profit jumped 27% as each of Disney's segments posted top-line gains in the quarter. Cable network sales ticked up 6%, and we still anticipate the company can achieve a high-single-digit growth rate during the next several years as a result of increased affiliate fees and higher potential advertising. Importantly, advertising sales at ESPN were up 10% in the quarter, and management was quick to mention that ad sales are pacing "up slightly" despite the upcoming Winter Olympics. We expect some margin compression through 2015 as a result of higher NFL and MLB costs and have baked this into our financial model; we encourage long-term investors to look through this noise. Parks and resorts revenue grew 6% year over year, despite a difficult comparison, and resort reservations have accelerated (up 7%) heading into the fiscal second quarter. The company continues to reap the benefits of its park investments and upgrades, and the recent successes of its theatrical launches only serve to strengthen demand. On the studio front, which is the most choppy and arguably unpredictable of Disney's segments, the firm posted a 23% increase in revenue, driven by the theatrical release of Frozen ($870 million to date, without a formal launch in either China or Japan) and the second installment of the Thor franchise.  

Disney posted an impressive 500-basis-point gain in the pretax margin during its fiscal first quarter, and while management was pleased, we also consider normalized profitability and think about what the firm is doing today, which hasn't yet shown up in the numbers. As a case in point, Frozen, which surpassed The Lion King as Disney's most successful animated movie of all time, will officially become a Broadway production and could still evolve into other revenue-generating renderings (as only Disney can envision). Likewise, management reiterated (and teased conference-call listeners somewhat) that Star Wars: Episode VII is still slated for release in December 2015. We view the Lucasfilm acquisition as one that will bear fruit during the next decade as the company starts to take advantage of the intellectual property.

Following our fair value estimate increase, we view the stock as fairly valued, trading in 3-star territory and at approximately 17 times our fiscal 2015 earnings-per-share estimate. We reiterate our view that Disney is a high-quality business, but we'd wait for at least a 10% discount to our fair value estimate before getting more excited about the valuation.

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