Maximize Theme Park Profitability to Maximize Profit Disney Continued to Invest in the Theme

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In the three months ending 2 July, Disney grew revenues 26% to $21.5bn. Disney ended the quarter with 221m subscribers to its streaming services picking up 14.4m Disney+ subscribers in the quarter.

Operating profit ended 50% higher at $3.6bn as Disney Parks, Experiences and Products more than offset a fall in Media and Entertainment Distribution. Underlying Earnings Per Share (EPS) rose from $0.80 to $1.09.

Disney is not currently buying back its own shares or paying dividends.

The shares were up 4% in after-hours trading.

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Our view

Disney's recovery has continued into the third quarter. A deluge of customers returning to its very expensive-to-run theme parks means revenues and profits have been dragged up, after a very tumultuous couple of years.

Of course, the main headline grabber lately has been the streaming business, including Disney+, ESPN+ and Hulu. This is an important pivot, because despite stellar performances lately, we've probably seen Cable's last hurrah.

It's impossible not to be impressed by recent subscriber growth. After Netflix shocked the market with a subscriber slowdown, we'd wondered if Disney+ would follow suit. Disney's subscriber beat is partly down to the dynamics of scale - it simply has more room to run before bumping up against the side of the tank.

It's important to note that this part of the business is heavily loss making. We concur with the old adage, revenue for vanity, profit for sanity. Once the landgrab starts to slow, we would expect investors to pay closer attention to the streaming division's bottom line.

All of this seems very positive, but exponential growth could be more difficult to come by, now that Disney has overtaken Netflix in subscriber numbers.

Disney is having to spend heavily to maintain its edge, taking profits with it. And while the addressable market is huge - inflation may throw a spanner in the works. Household budgets under review means luxuries like multiple streaming subscriptions may come under fire. Disney needs customers to continue signing up in droves, or plans to scale and dig itself out of loss making territory will get thrown.

Fortunately we think Disney has a head start on rivals. An excellent content catalogue - whether that's princesses on Disney+ or quarterbacks on ESPN - is one thing - but Disney's ability to sell those products through a variety of channels, multiplies the benefit many times over. Theme parks, computer games, Disney Stores - all help the group squeeze maximum benefit from its content.

The $71bn acquisition of Twenty First Century Fox loaded the business up with debt. While not at dangerous levels, if interest rates are hiked faster than planned, debt reduction could become the main focus - taking resource from other areas.

Disney's valuation has come down significantly since the start of the year, as the group's been caught up in the wider move away from growth stocks. We're not convinced this has been a fair reaction. Over the long-term, Disney has an excellent offering and should be held in good stead. The main driver of any market reactions will be the speed at which it can grow its streaming business - ups and downs can't be ruled out and there are no guarantees.

Disney key facts

• Forward (next 12 months) price/earnings ratio: 21.9
• Ten year average forward price/earnings ratio: 22.9
• Prospective dividend yield (next 12 months): 1.2%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter results

Disney Media and Entertainment Distribution saw revenue growth of 11% to $14.1bn, with highest growth from Direct-to-Consumer and Content Sales/Licencing and Other. Segment operating profit fell 32% to $1.4bn as strong growth in Linear Networks was more than offset by losses in the Direct-to-Consumer division. Despite subscriber growth, the increase in operating loss was due to a higher loss at Disney+ and ESPN+ and lower operating profit at Hulu.

Disney Parks, Experiences and Products saw a big jump in revenue to $7.4bn, up 70%. This was mostly driven by domestic parks and experiences, which more than doubled in revenue due to a full re-opening compared to 2021's third quarter. International parks also grew but was partially offset by the Shanghai Disney Resort as it opened for 3 days in the quarter. Segment operating profit leapt from $0.4bn to $2.2bn.

Free cash flow fell from $528m last year to $187m as the group invested heavily in parks. Disney ended the period with net debt of $38.6bn.

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Source: https://www.hl.co.uk/shares/share-research/202208/disney-return-of-theme-parks-gives-revenue-a-boost

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