Investing Club: Disney rewards its patient investors with a blockbuster quarter

Published Wed, Feb 9 20227:36 PM ESTUpdated Wed, Feb 9 20227:37 PM EST

Club holding Disney (DIS) reported much better-than-expected fiscal first-quarter results Wednesday evening. Revenue of $21.819 billion, a 34 gain year-over-year, exceeded estimates on of $20.270 billion, according to Fact Set. Adjusted earnings-per-share, meanwhile, hit $1.06, nicely higher than $0.74 the prior year and estimates this year of $0.74. Bottom line We know this has been a tough stock to own over the past few months, but we stuck by Disney and opportunistically added to our position a few weeks ago here on the Netflix-driven selloff because we know this company to be much more than just a streaming play. And the domestic parks proved it this quarter with unbelievable profitability despite capacity constraints and lack of international guests, making it clear that management's investments in new services and experiences are paying off in a big way. Meanwhile, it was great to see Disney+ subscriber growth trends pick up above expectations, but there is still so much more to the story here as the meaningful content push later this year is expected to draw in even more subscribers. Disney's upcoming slate gives reasons to believe that the stock price can go higher as we move through the year, even as the stock was pushing nearly 7% higher to about $157 in after-hours trading. Breaking it down by segment Disney Media and Entertainment Distribution (DMED) Revenues of $14.59 billion (+15% YoY) edged estimates of $14.51 billion, and operating income of $808 million (-44% YoY) beat estimates of $744.6 million. Within the segment, Linear Networks revenue of $7.71 billion (flat YoY) missed estimates of $7.67 billion, but operating income of $1.50 billion (-13% YoY) exceeded the $1.28 billion estimate. Notably, advertising revenue at ESPN increased 14% YoY and CFO Christine McCarthy said on the call that so far in the second quarter domestic cash advertising sales are "currently pacing up." Direct-to-Consumer revenue slightly missed estimates of $4.78 billion (+34% YoY), and the operating loss of $593 million (-27% YoY) was larger than the $481.5 million loss analysts were anticipating. But the headline numbers here do not tell the full story of the quarter. Disney ended the quarter with 129.8 million Disney+ subscribers, up from 118.1 million last quarter and above Street Account estimates of 125.7 5million. This is a great result, especially as many feared a bigger slowdown after the Netflix quarter. And the growth was spread out by region, with domestic paid subs up 4.1 million (2 million were due to a bundling strategic decision), International ex-Hoststar up 5.1 million thanks to growth in Asia Pacific (new market launches) and European markets, and even Disney+ Hotstar markets returned to growth with an addition of 2.6 million paid subscribers. Management reiterated their view that they expect Disney+ subscriber growth in the back half of the fiscal year to exceed growth in the first half. We think this target is achievable due to the robust content slate Disney is set to release later this year. Long term, management backed their guidance of 230 million to 260 million total paid Disney+ subs by the end of fiscal 2024 During the conference call, management discussed a new trend of adding more general entertainment over to Disney+. This is a positive shift. Adding general entertainment to the platform caters to potential subscribers who may not be the biggest Marvel or Star Wars fans. Average revenue per user, or ARPU, for Disney+ was better-than-expected at $4.41 vs. $4.36. Elsewhere, ESPN+ ended the quarter with 21.3 million subscribers vs. estimates of 18.61 million. ARPU of $5.16 was higher than estimates of $4.87. Total Hulu subscribers hit 45.3 million, almost in line with the 45.52 million estimates. Hulu SVOD-only subscribers reached 40.9 million vs. 40.81 million expected, with APRU of $12.96 vs. $13.78 estimates. Live TV + SVOD subscribers were 4.3 million vs. 4.07 million estimates. APRU was $87.07 vs. $84.47 estimates. Content Sales/Licensing and Other sales of $2.43 billion (+43% YoY) slightly beat the $2.26 billion estimate, and the operating loss of $98 million (compared to income of $188 million last year) was larger than the $50.3 million loss analysts were expecting. The YoY decline in operating results was due to lower theatrical distributions results and higher film cost impairments, partially offset by higher TV/SVOD distribution results. Disney parks, experiences and products Revenues of $7.23 billion ( > 100% YoY) greatly exceeded estimates of $6.34 billion, and operating income of $2.450 billion crushed estimates of $1.40 billion. The numbers here are an absolute blowout and CEO Bob Chapek said on the call that this was the segment's second-best quarter in company history. (Before the call, Chapek was interviewed on CNBC. The Club broke down the four things he said that gave us confidence.) Driving the beat was Parks & Experiences, which reported total revenue of $5.661 billion compared to estimates of $4.53 billion, and an operating profit of $1.58 billion compared to estimates of $510.4 million. Domestic Parks & Experiences reported revenue of $4.8 billion and an operating profit of $1.555 billion. Both of these figures exceeded pre-pandemic levels despite attendance that is still down from 2019. Disney's ability to make more money off fewer guests gives us confidence that there is a margin expansion story within the parks. Per capital spending at the domestic parks was up more than 40% versus fiscal first-quarter 2019 and not just because of tickets, higher food and beverage, and merchandise spending. It was also helped by contributions from Genie+ and Lightning Lane which also improve the overall guest experience. International Parks & Experiences reported revenue of $861 million and an operating profit of $21 million. The profitable quarter reflected improving trends at Disneyland Paris and Hong Kong Disney, though the latter is temporarily closed due to a resurgence in COVID-19 cases in the region. Consumers Products delivered revenue of $1.53 billion compared to estimates of $1.8 billion, and operating income was light as well at $874 million vs. $945 million expected. (Jim Cramer's Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS A