After Wednesday's closing bell, media giant Disney (DIS - Get Report) delivered very healthy fiscal second quarter numbers. The revenue and earnings beat showcased strength in the company's parks and experiences business, along with welcome resilience in its largest media networks segment.
However, the headline news spoke little to what will likely be Disney's main growth story playing out over the next five years: the anticipated ramp up in direct-to-consumer services.
But before addressing the longer-term opportunities in more detail, let's take a closer look at the results of the quarter.
Sales of $14.9 billion increased 3% over year-ago levels, leaving behind the Street's consensus estimate of $14.4 billion. To be fair, 11 days worth of revenues from 21st Century Fox properties and Hulu, which were acquired earlier in the year, boosted the top-line number that would have otherwise been flat on an organic basis.
As previously mentioned, the bright star in the quarter was the parks, experience and products division, whose operating profits increased by 15% year-over-year. The robust segment results are not surprising, considering the strength of the global economy that drove high demand for entertainment services. And the performance could have been even better if not for the timing of the Easter holiday, which this year fell in the fiscal third quarter.
Once upon a time, a struggling ESPN business used to serve as a drag on Disney's financial results, often contributing to bearishness about the company and its stock. But this time, cable networks saw a modest but still-appreciated 2% improvement in both sales and profits, even without the help of the college football semifinals that took place in the previous period.
All things considered, adjusted earnings per share of $1.61 topped expectations by four cents. Still, EPS fell 12% below last year's number, primarily the result of investments in growth initiatives and the high bar that last year's Black Panther and Star Wars releases set in the studio entertainment business. Any benefit from the highly successful Avengers: Endgame and its impressive $2.3 billion box office to date will only be captured in the fiscal third quarter.
It's All About The Transformation
Accounting for not much more than a blip in the quarter's financial statements (6% of total company revenues, to be precise) was perhaps what will become the most meaningful driver of Disney's longer-term growth. The direct-to-consumer and international division is still experiencing little uplift from the one-year-old ESPN+ venture and the recently-acquired Hulu. But things are about to change.
With the acquisition of most of Fox's entertainment and media assets and the announcement of a new streaming service to be launched in November, Disney has officially kicked off a massive business transformation process. In addition to owning an enviable content library, the new Netflix-like (NFLX - Get Report) media distribution model might help Disney build a reliable revenue-producing machine.
The company could amass up to 160 million users across its three streaming platforms by 2024, a figure shared during the company's most recent Investors Day event. Assuming current subscription prices, DTC alone could produce $12 billion in annual revenues within five years, one-fifth of the total sales the company delivered in fiscal 2018. Better yet, the landmark would be reached right around the time that the management team projects direct-to-consumer services will achieve sustainable levels of profitability.
Certainly, Disney has its hands full and quite a bit of work yet to be done. But the path to significant top- and bottom-line growth has been laid ahead. Should the company execute well on its transition plan over the next few years, an investment in the stock at current levels will likely be properly justified, proving the forward earnings multiple of 20x to be overly conservative.