Model Updates & Takeaways From the Disney Results
Author: John Moschella CFA, CPA Published: February 9, 2016 at 7:00pm Category: Earnings Review
We have updated our Walt Disney Co (NYSE:DIS) Earnings & Valuation Model to include today’s results and management’s latest guidance. Here are a few of the items we considered in our model updates:
1) Cable Networks Disappoints: The growth rate in revenue and operating income was a bit lower than our expectation. We left the quarterly growth rates constant in our model for the next three quarters which resulted in a 4.8% growth in operating income from 2013 levels. This is consistent with the mid-single digit growth rate which management guided to on the F3Q15 call and reiterated tonight.
We believe the low operating margin for Cable of 26% compared to 39% last quarter, could be driving the +3% share declines in after-hours; however, it is important to remember that management confirmed the mid-single digit growth for full-year 2016 operating income, which implies a much higher operating margin for the rest of the year. As a result, we have left our Cable assumptions ‘as is’ for the time being.
2) Studio More Than Picked up the Slack: Studio results were way above our modeled expectations, and operating margin was the highest it’s been in more than two years, driven by the success of The Force Awakens.
3) Other Model Assumptions: We kept our share repurchase assumptions for 2016 consistent at $7B total estimated repurchases for the year. We increased the tax rate slightly for the remainder of 2016, and increased our equity investment income estimate.
Impact of Model Updates on Valuation:
Based on the assumptions above, our Next Twelve Month (NTM) model-based, diluted EPS estimates moved from $5.65 to $6.21. Net Debt per share increased to $6.80; therefore, our new market multiple-based valuation is $98.
Our DCF valuation increased from $96 to $101.50 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 increased from $94 to $101.50. Our multiple and primary DCF inputs were held constant in this analysis 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.
Sensitivity on Cable Networks Business: If we had brought the operating margin on the cable business for the rest of 2016 down to the F1Q16 results reported today, the PE-based share valuation would move down to $89 per share; However, as we mentioned, this would result in an operating income for the segment well below the guidance given by management.
Sources: Company reports, SEC filings, and investor presentations.
1) Cable Networks Disappoints: The growth rate in revenue and operating income was a bit lower than our expectation. We left the quarterly growth rates constant in our model for the next three quarters which resulted in a 4.8% growth in operating income from 2013 levels. This is consistent with the mid-single digit growth rate which management guided to on the F3Q15 call and reiterated tonight.
We believe the low operating margin for Cable of 26% compared to 39% last quarter, could be driving the +3% share declines in after-hours; however, it is important to remember that management confirmed the mid-single digit growth for full-year 2016 operating income, which implies a much higher operating margin for the rest of the year. As a result, we have left our Cable assumptions ‘as is’ for the time being.
2) Studio More Than Picked up the Slack: Studio results were way above our modeled expectations, and operating margin was the highest it’s been in more than two years, driven by the success of The Force Awakens.
3) Other Model Assumptions: We kept our share repurchase assumptions for 2016 consistent at $7B total estimated repurchases for the year. We increased the tax rate slightly for the remainder of 2016, and increased our equity investment income estimate.
Impact of Model Updates on Valuation:
Based on the assumptions above, our Next Twelve Month (NTM) model-based, diluted EPS estimates moved from $5.65 to $6.21. Net Debt per share increased to $6.80; therefore, our new market multiple-based valuation is $98.
Our DCF valuation increased from $96 to $101.50 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 increased from $94 to $101.50. Our multiple and primary DCF inputs were held constant in this analysis 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.
Sensitivity on Cable Networks Business: If we had brought the operating margin on the cable business for the rest of 2016 down to the F1Q16 results reported today, the PE-based share valuation would move down to $89 per share; However, as we mentioned, this would result in an operating income for the segment well below the guidance given by management.
Sources: Company reports, SEC filings, and investor presentations.
