Disney Shares Look Attractive

Revenue grew 9% during last year to $13.1 billion, in line with our estimate. The revenue growth occurred at three of four largest segments (media networks, parks and resorts, and consumer products) with studio entertainment flat versus last year. Segment operating income increased 27% to $3.5 billion, well above our $3.0 billion estimate, as studio entertainment more than doubled its operating income despite flat revenue. The growth was as a result of improved TV/SVOD distribution and better theatrical performance (driven by Inside Out and Ant-Man). We expect revenue growth for the segment to rebound next quarter due to the opening of Force Awakens and Pixar's Good Dinosaur.

CEO Bob Iger reiterated his remarks on ESPN from last quarter and noted that there was no need to panic. We agree the reaction was overblown and the media environment is changing. While consumers have more choices, media companies have more outlets for their content from linear TV to SVOD. Two recent deals demonstrate the growth of distribution channels. The company announced that its cable channels and ABC (in certain markets) will be available on PlayStation Vue, a linear OTT TV service. More interestingly, Disney is launching DisneyLife, a SVOD service, in the U.K. with Disney content aimed at kids. Despite the high price (GBP 9.99/month versus Netflix at GBP 5.99/month), we see the service as a fascinating test case for standalone Disney SVOD from a demand and technical standpoint.

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