Stock in Focus: Disney
Disney reported mixed results for the quarter. The good: streaming losses fell to $659M from the previous quarter’s $1.1B, whereas streaming revenues rose +12% to $5.5B. Crucially ARPU (average revenue per user) rose 20%in the US and ~6% internationally — it’s a case of squeezing actual profit out of users rather than scaling the business at all costs — this is the new “raison d’etre” of streamers globally, as heralded by WBD CEO Zaslav a few quarters ago — like in Jerry Maguire, “show me the money”.
And now for the bad: total users fell to 157M from 161M — this was mostly due to Disney+Hotstar, an Indian subscription service — it was mostly an outlier; users lost ex Hotstar sat in the hundreds of thousands.
The ugly: linear (“trad”) TV revenues fell 7%, largely due to the increased cost of sports rights and declining advertising revenues. We’ve seen this across the board – WBD and Paramount saw the same. Theme Parks continue to go gangbusters – domestic parks revenue up 14%to $5.6B and intl parks revenue up +100% to $1.2B. We think analysts often forget the parks division – the company is not just a streaming company, but the world’s dominant entertainment company. We like Parks because it differentiates the revenue stream vs. Netflix and competitors: there’s all that extremely loyal (and “sticky”) Park + Cruises revenue. Going forward we’re interested in how the company manages margins — there’s been a lot of “cost creep” this quarter — increased costs meant Parks income declined 11% and linear TV income declined 35% — it is undoubtedly a tougher operating environment out there. Retain BUY – preference is DIS WBD PARA in order of preference. Trading at lower multiples than rival Netflix and retains very strong.
New Zealand
The New Zealand market (NZX 50, +0.8%) was up yesterday, on a day of broad-based gains. Pushpay made its exit from the NZX finalising its takeover from BGH Capital and Sixth Street.
Trading update from Ryman (neutral – preference Summerset and Oceania) — seeing UPAT up +12% and revenue up +18%. Good read-through for its rivals; we think Ryman still holds too much debt and prefer Summerset as a quality pick and Oceania as a value pick. Steel and Tube warned second-half volumes are expected to fall 10-15% from the first half, citing recessionary impacts reducing demand. Another look-through for weaker earnings ahead for Vulcan Steel and Fletchers – but partially priced in. Estimating EPS -30% for FY23; -21% for FY24. Not quite the bottom of the cycle – no view but avoiding these for now.
US
We’re not getting that excited about CPI numbers –core CPI rose 0.4% and continues to sit stubbornly at 5% — the main contributor to this is of course services-linked inflation, which even when stripped of housing remains elevated. Wages continue to be another driver of elevated services inflation –on a ~10 year stack there’s a clear change from wage growth pre-COVID and post-COVID. A few charts: the first is core-CPI ex-housing; all those Starbucks lattes have to go somewhere (and trips to Italy, and everything else) – note how services remains elevated compared to everything else. The second is that employment cost index — they remain stubbornly elevated, too.. The third is that median wage growth — there’s been chop, but excluding December’s figures it also remains elevated in the 6-7% range — given all this we think the Fed cutting for the year is highly unlikely.
