A Tale of Two Catalysts: Unbundling vs The Force Awakens
Author: John Moschella CFA, CPA Published: February 8, 2016 at 6:30pm, Category: Earnings Preview
We have calibrated our Walt Disney Co (NYSE:DIS) Earnings & Valuation Model to meet consensus estimates in preparation for this week’s earnings release. Here are a few of the items we considered in our model updates:
1) Unbundling: The impact of unbundling cable networks has been a hot topic of conversation on Disney earnings calls over the last few quarter, since the Cable Networks Segment makes up more than a third of total revenue. Last quarter management discussed the possibility of moving more content to Subscription Video-on-Demand (SVOD) services, or direct-to-consumer offerings, and away from the Multi-Channel Video Program Distributors (MVPDs). Management also highlighted the launch of Disney Life in the UK which is a new direct-to-consumer offering. Any discussion around the future business model of the Cable Networks Segment will likely have a significant impact on shares.
In our current model we have Cable Networks revenue increasing just over 1% in fiscal year 2016 with operating income growth from fiscal year 2013 up mid-single digits, consistent with the guidance given on the fiscal third quarter conference call.
2) The Force Awakens: The Star Wars franchise will continue to be a catalyst for shares over the next three years, with two more movies in the series, and two additional spin-offs to come. Disney is well positioned to capitalize across multiple platforms including Studios, Consumer Products, and Parks.
In our earnings model we have included the primary Star Wars benefit in the Studio and Parks Segments with estimated revenue/operating income year over year growth rates of 30%/33%, 6%/11% respectively. In 2017 we added an additional boost to our Parks revenue and operating income to reflect the first full year of Shanghai Disney results.
3) Other Model Assumptions: Our share repurchase assumptions remain at approximately 15M shares per quarter through fiscal year 2016 as last quarter management reiterated their repurchase guidance of $6B to $8B for the year. We left our fiscal year 2016 interest and effective tax rates unchanged from our previous model.
EPS & Valuation Assumptions Ahead of the Release
Based on the assumptions above, our F1Q16 and Next Twelve Month (NTM) model-based, diluted EPS estimates are $1.44 and $5.65 in-line with the consensus estimate.
Our Disney model is a Tier 1 model, which means we value shares using two approaches: 1) a market multiple approach, and 2) a Discounted Cash Flow (DCF) valuation, and then weight each by 50%.
For our market multiple valuation, we are using a NTM Price-Earnings (PE) ratio of 17x excluding the value of net debt, which results in a valuation of $92 (17.4 x $5.65 - $5.14).
Our DCF valuation of $96 is based on a Beta, Equity Risk Premium (ERP), WACC, and terminal growth rate of 1.55, 5.1%, 9.2%, and 2% respectively.
Our 12-month price target based on a 50%/50% weighting of our market multiple/DCF valuation is $94. Our multiple and primary DCF inputs will be held constant after the company releases results to isolate the impact of price movements from earnings results only. To see the details of our estimates or to plug in your own assumptions please download our model below.
Sources: Company reports, SEC filings, and investor presentations.
1) Unbundling: The impact of unbundling cable networks has been a hot topic of conversation on Disney earnings calls over the last few quarter, since the Cable Networks Segment makes up more than a third of total revenue. Last quarter management discussed the possibility of moving more content to Subscription Video-on-Demand (SVOD) services, or direct-to-consumer offerings, and away from the Multi-Channel Video Program Distributors (MVPDs). Management also highlighted the launch of Disney Life in the UK which is a new direct-to-consumer offering. Any discussion around the future business model of the Cable Networks Segment will likely have a significant impact on shares.
In our current model we have Cable Networks revenue increasing just over 1% in fiscal year 2016 with operating income growth from fiscal year 2013 up mid-single digits, consistent with the guidance given on the fiscal third quarter conference call.
2) The Force Awakens: The Star Wars franchise will continue to be a catalyst for shares over the next three years, with two more movies in the series, and two additional spin-offs to come. Disney is well positioned to capitalize across multiple platforms including Studios, Consumer Products, and Parks.
In our earnings model we have included the primary Star Wars benefit in the Studio and Parks Segments with estimated revenue/operating income year over year growth rates of 30%/33%, 6%/11% respectively. In 2017 we added an additional boost to our Parks revenue and operating income to reflect the first full year of Shanghai Disney results.
3) Other Model Assumptions: Our share repurchase assumptions remain at approximately 15M shares per quarter through fiscal year 2016 as last quarter management reiterated their repurchase guidance of $6B to $8B for the year. We left our fiscal year 2016 interest and effective tax rates unchanged from our previous model.
EPS & Valuation Assumptions Ahead of the Release
Based on the assumptions above, our F1Q16 and Next Twelve Month (NTM) model-based, diluted EPS estimates are $1.44 and $5.65 in-line with the consensus estimate.
Our Disney model is a Tier 1 model, which means we value shares using two approaches: 1) a market multiple approach, and 2) a Discounted Cash Flow (DCF) valuation, and then weight each by 50%.
For our market multiple valuation, we are using a NTM Price-Earnings (PE) ratio of 17x excluding the value of net debt, which results in a valuation of $92 (17.4 x $5.65 - $5.14).
Our DCF valuation of $96 is based on a Beta, Equity Risk Premium (ERP), WACC, and terminal growth rate of 1.55, 5.1%, 9.2%, and 2% respectively.
Our 12-month price target based on a 50%/50% weighting of our market multiple/DCF valuation is $94. Our multiple and primary DCF inputs will be held constant after the company releases results to isolate the impact of price movements from earnings results only. To see the details of our estimates or to plug in your own assumptions please download our model below.
Sources: Company reports, SEC filings, and investor presentations.
