Walt Disney Co (DIS) Common Stock

Disney’s second-quarter revenue moved 1% higher to $22.1bn, in line with market expectations. Higher ticket prices helped its Experiences division, which includes its theme parks and cruises, to grow revenue by 10%. This was largely offset by a 5% revenue drop in the Entertainment division due to declines in linear (traditional) networks and content sales, which outweighed growth in direct-to-consumer entertainment (Disney’s streaming brands).

Operating income grew 17% to $3.8bn, as the group continues to benefit from last year’s cost-cutting initiatives.

Free cash flow was up 21% to $2.4bn. Net debt increased from $32.2bn to $39.7bn.

Full-year earnings per share guidance has been raised from at least 20% to 25%.

The group completed $1.0bn of share buybacks in the period.

The shares fell 4.8% in pre-market trading.

Our view

Disney’s second-quarter results came in broadly in line with market expectations, but that wasn’t enough to stop the shares being punished in pre-market trading.

Growth of Disney+ has been phenomenal and the service quickly emerged as a worthy opponent for industry titans. The part that gives Disney an edge is its pre-existing stable of intellectual property. It has a pre-loaded, and pre-approved, content cupboard. Disney is well-placed to capture demand. But every story has a villain.

Disney+ has grappled with eye-watering costs. Getting a streaming service off the ground is not a cheap undertaking. Nor is attracting and retaining customers, especially in the early stages. That’s why it was pleasing to see Disney+ and Hulu post a profit for the first time today, a big improvement from the $587mn loss this time last year.

This turnaround in fortunes was helped in large part by price hikes. But the competitive landscape remains very tricky. While we admire Disney's position, consumers are fickle beings, and there's no guarantee Disney will reign supreme.

Streaming being a long-term success is important because Disney's broader media business is heavily exposed to traditional linear TV. Cable to you and me. We think the likes of ESPN is a great asset, especially its streaming potential, but the legacy industry is in structural decline.

Then there's the theme parks. These are another way for Disney to juice the same intellectual property for cash over and over again. We continue to think parks are a strong asset, with loyal fans likely to flock to the gates for years to come. But this part of the business is more likely to see peaks and troughs. A tough economic landscape will see families reduce spending, and events like lockdowns decimated profits. We like the theme parks, but they are unlikely to stoke high-octane growth.

Disney is carrying a fair whack of debt – around $40bn at the last count. A lot of that's a hangover from the mega-merger with Fox. The group's substantial free cash flow means we aren't overly concerned, but debt management could take precedence over the medium term and will need to be monitored.

Disney is an excellent business with compelling growth opportunities. Market sentiment will continue to be driven by growth in the streaming business, which remains a highly competitive space, and that could lead to ups and downs.

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