I’ve been a big fan of The Walt Disney Company (NYSE:DIS) in the past year or so, suggesting several times that the stock might be undervalued. The combination of an improving economy and a strong slate of movie releases looks to have the “Mouse House” positioned for positive results. While I’m happy to see that investors have agreed with me, I think investors need to allow The Walt Disney Company (NYSE:DIS)’s stock to take a rest while its results catch up to the stock price.
One of my core arguments for Disney doing well this year was the upcoming and current releases of movies like Iron Man 3, Thor: The Dark World, Monsters University, The Lone Ranger, and more. While nothing has changed about my thesis that these movies will propel The Walt Disney Company (NYSE:DIS)’s earnings, investors need to realize that the company’s Studio Entertainment division represents about 13% of total revenue. The two much larger divisions are Disney’s Media Networks and Parks and Resorts businesses.
The company’s results weren’t bad in any of their divisions, but I’m afraid investors are expecting too much from the rest of the year. Media Networks reported overall revenue growth of 6%, led by ESPN. With 74.21% of The Walt Disney Company (NYSE:DIS)’s operating income generated by this division, it’s critical that ESPN and ABC hold their own. I’m a little worried about ABC.
ABC saw revenue down 2% in the current quarter, while competitor CBS Corporation (NYSE:CBS) reported a 8% increase, and Time Warner Inc (NYSE:TWX)‘s TBS and TNT properties reported a low single-digit increase. The only major network to do worse than ABC, was NBC, which is owned by Comcast Corporation (NASDAQ:CMCSA). However, the comparison is a bit unfair, because Comcast had the benefit of the Super Bowl last year, whereas this year CBS benefitted from this event. Without the Super Bowl issue, NBC’s revenue would have been relatively flat versus last year.
Disney’s Parks and Resorts and Studio Entertainment followed my basic premise that increased attendance would drive the Parks’ results, and that strong movies would drive the Studio’s results. With revenue up 14% at the Parks and Resorts division, and a 13% increase at Studio Entertainment, there is certainly nothing wrong with these results.
Those 4 Problems
Looking at the above numbers, investors would be right to be proud of The Walt Disney Company (NYSE:DIS)’s performance. However, there are a few problems.
First, Disney is the only one of its peers to show an increase in diluted shares over the last year. While CBS retired 4.35% of their diluted shares, Time Warner retired 3.4%, and Comcast retired 2.51%, Disney’s share count increased by 0.61%. This isn’t a massive increase, but it will make future earnings comparisons more difficult.
The second issue: The Walt Disney Company (NYSE:DIS)’s revenue growth isn’t translating into superior operating cash flow growth. I use “core operating cash flow,” which is net income plus depreciation when comparing companies. This measure strips away items like tax benefits, adjustments to assets and liabilities, and other non-cash items.