Disney Shares Look Attractive After Mixed Quarter

Revenue increased by 4% year on year to $13.0 billion, just below our $13.1 billion estimate. The revenue growth was led by studio entertainment with a 22% improvement. EBITDA increased 8% to $4.0 billion, above our $3.7 billion estimate, as the 24% improvement at studio entertainment and the 13% improvement at media networks more than offset the 8% decline at consumer products. The improvement at media networks despite flat revenue growth was due to the timing of the college football playoff games and affiliate fee growth offsetting lower ad revenue. The improvement in the parks and resorts segment was driven by improved domestic performance, and was slightly offset by increased preopening expenses for the Shanghai resort.

The company announced the end of the Disney Infinity franchise after the final playset release in June. Disney will no longer publish video games for consoles and its console video game studio, Avalanche Software, will be shut down. Management noted the first two iterations of Infinity sold well but the company did not have confidence in the long-term stability of the space. We note that Skylanders for Activision underperformed in its most recent release and that toys-to-life video game may be reaching a saturation point. Given the success of Star Wars Battlefront and other licensed games, Disney believes that licensing games will provide a better return than developing and publishing games.

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