High-Quality Disney No Bargain

While we expect Disney to continue to execute and increase the top and bottom lines, we remain sensitive to valuation. The shares currently trade in 3-star territory and at approximately 20 times our fiscal 2015 EPS estimate. We reiterate our view that Disney is a high-quality business, but we'd wait for a larger discount to our fair value estimate before getting excited about investing.

First-quarter revenue grew 9% over last year to $13.4 billion, above our estimate of $12.9 billion. The revenue growth at three of four largest segments (media networks, parks and resorts, and consumer products) offset a slight expected decline at studio entertainment as F1Q14 included the oversized impact of Frozen. EBITDA increased 18% to $3.7 billion, well above our $3.2 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 113 basis points due to the impact of increased sport rights at ESPN. Consolidated adjusted operating income grew 14% year over year to $3.4 billion with a 25.1% margin.

Management once again spent time on the call discussing the changing media landscape, and Disney’s place and opportunities within that landscape. Even with the recent launch of Sling TV, management noted that the company would take a cautious approach towards disintermediating its content from the multichannel video programming distributors (MVPDs). While the company would like to have a direct relationship with its customers, management continued to acknowledge the value and importance of the cable bundle to its channels and bottom line. We stress that the cable bundle still has strength even in a world of cord-cutters and cord-nevers, and that Disney owns some of the most valuable branded properties in the media space. We also note that a method for the company to initiate that direct relationship could come via its acquisition Maker Studios, a multi-channel YouTube network that has a large direct relationship with a number of younger content consumers.

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