Summary
- Disney will release "Mulan" exclusively on its Disney+ platform at a premium price.
- Post earnings, this will serve as a positive catalyst for the company in the long and short run.
- Management is reacting to big revenue/profit declines and looking at ways to counterbalance theme park issues during the CoV-2 macro event.
- With multiplexes shuttered, Disney is in a great position to use its own Disney+ platform to get its celluloid product into the marketplace at a good margin.
- The stock is expensive and perhaps risky on a short-term basis, but for longer-term thinkers willing to average in if necessary, it should increase in value over time.
Disney (DIS) is trading pretty well these days, all things considered. And by all things, I refer to SARS-CoV-2. The stock has recovered a lot of ground since dipping below $80 earlier in the year. Too much ground, some might argue, given the continuation of the macro crisis. Disney shares even received a bid following the recent earnings report.
I'm going to look at some aspects of the Q3 numbers, but my focus with this piece is to briefly consider a premium-video-on-demand experiment proposed by the company for the movie Mulan. This was a project that was supposed to be released back in the springtime. A malicious RNA chain derailed those plans and shut down Hollywood altogether. I believe steeply pricing Mulan for digital is a proper strategy. I'll discuss that and will touch upon my opinion on Disney's current valuation (it's expensive in the short term, but for the long term, the shares should turn out to be a good investment).
Q3: It Is What It Is
No one expected this to be a great quarter on an objective basis, and it wasn't. It was unavoidable. According to the release, there was a scary 40% drop in the top line, going from $20 billion last year to a little under $12 billion this year. Thankfully at least, revenues of $50.7 billion were slightly higher for the nine-month tally. Adjusted earnings on a diluted basis fell well over 90% to $0.08 per share during Q3, and over 50% to $2.22 per share over the last nine months. Free cash flow for the quarter was about $450 million versus negative free cash of over $2.9 billion last year. Over the last three quarters, the free cash comparison was almost $2.7 billion versus $700 million. The company certainly has cash generation under control, and this was partially sourced to beneficial changes in working capital (accounts receivable) and lower tax expenditures.
The studio segment saw its revenue decline over 50%, coming in at $1.7 billion in the third quarter. Over the nine-month frame, sales rose a modest 3% to $8 billion. Over time, such longer-term performance should weaken as the virus problems continue. For income, Disney's moviemaking operations experienced a profit drop of 16% to just under $670 million in Q3 and a 30% increase to $2 billion for the last three earnings periods. Again, enjoy that while you can.
We all know that the parks division is currently decimated in its economic performance, and that media networks and direct-to-consumer are capturing the attention of many analysts (as well they should). It is, however, the studio division that has caught my attention this quarter because of the aforementioned Mulan release on digital.
