After the bell Disney reported total revenues and pro forma EPS of $14.55 billion and $1.84 vs. the Street’s estimates of $14.11 billion and $1.70. The composition of revenues was a positive in our opinion and overall the quarter was “better than feared”, with a stronger than expected bottom-line performance front and center. This quarter fundamentals take a back seat as the major focus around Disney & Iger will be the Fox acquisition and potential Comcast competing bid coming down the road, streaming endeavors, and the launch/initial data points around the streaming ESPN service recently launched. In terms of 1Q, Media and Networks revenue of $6.14 billion was generally in line with the Street’s $6.09 billion, with the stand out being Parks and Resorts revenue of $4.88 billion coming in nicely ahead of the Street’s $4.69 billion. Studio revenue of $2.45 billion also came in ahead of the Street’s $2.19 billion and will be viewed a relief by the Street given some of the choppiness seen over the last few months on the box office front, while Consumer/Interactive of $1.08 billion was slightly below the Street’s $1.14 billion but somewhat expected. The biggest news will be the early signs of success of ESPN Plus that the bulls look to hear about on the earnings call, Disney’s first ever $4.99 per month direct to consumer offering which is music to the ears of investors that have long awaited for this strategic move to stem some of the sub loss on the ESPN front. This over the top service rolled out this spring and we believe this was a “no brainer” move for Iger to launch this and further capitalize on its flagship ESPN franchise. With this service having massive amounts of sports content, it’s the perfect foray into streaming in our opinion with Disney’s standalone service coming down the pike slated for 2019, with the Fox acquisition and Hulu ownership making the company a legitimate streaming player.
Another major topic on today’s call will be the flagship Fox acquisition which appears to be potentially get more complicated if Comcast decides to throw their hat in the Fox sweepstakes depending on anti-trust issues/AT&T Time Warner ruling. This Fox deal puts Disney in the catbirds seat in terms of content king and with its streaming service set to launch in 2019 Iger has a clear runway to gain market and mind share from the likes of Netflix. We continue to view this as a “home run deal” for Disney and while its an aggressive acquisition with a high price tag, in our opinion this is the right move at the right time as the marriage of these assets creates a much more formidable Disney on both the content and streaming front for the coming years with its primary goal to invade Netflix’s “golden streaming sandbox” when it launches its competitive service in 2019. Watching the strategic direction that Disney takes this deal on the content and Hulu fronts, coupled by domestic box office synergies will be a key focal point of the industry and the Street heading into the rest of 2018. In addition, the regulatory hurdles for this deal remain front and center to see if Iger gets the Fox deal through with a green light. The acquisition of the Fox entertainment assets and a controlling stake of Hulu would make Disney a much more formidable and dangerous competitor down the road on streaming in our opinion as the cost of content continues to escalate with Iger & Co. being in a position of clear strength on this frontier once (if) they consummate this deal. Ultimately we believe shares are range bound in the nearterm until the Fox deal and its trajectory/path becomes clearer with the Comcast situation and regulatory issues adding cloudiness to this saga and potential M&A battle royale. We maintain our Attractive rating and $120 price target on shares of Disney.