Disney (DIS) thoroughly trounced expectations in its second-quarter earnings release. But before you buy Disney stock, take a look at what’s driving revenues. Bulls aren’t likely to see a fairytale ending.
Disney announced earnings after the market close on Tuesday. Adjusted earnings per share came in at $1.11, up from 79 cents in the prior-year quarter and 15 cents ahead of the 96 cents consensus estimate. Revenues for the quarter were $11.6 billion, up 10% from the prior year.
On the surface, those number are fantastic. But picking apart the revenue numbers, the story gets a lot more interesting. A disproportionate share of the revenue growth came from two of Disney’s smaller — and most volatile — divisions, Studio Entertainment and Consumer Products. Company-wide, revenues rose $1.1 billion in the quarter. And $462 million of that growth came from movies and $122 million from Consumer Products — essentially the merchandising from said movies.
So, what’s the problem?
The problem is that these figures are not sustainable for Disney stock. They were massively juiced by ticket sales of Frozen, which has leapt ahead of Toy Story 3 to become the highest-grossing animated movie in history. (Animated movies are vastly more profitable than live-action movies, by the way. See “Investing in Oz.”)
Thor: The Dark World, one of the recent additions to the Marvel cinematic universe, was also a significant success.
Nothing against these movies, of course. My kids loved Frozen (my four-year-old son called it Princess Iceman), and my inner geek loved Thor. But winners like that don’t come along every year. And meanwhile, Disney’s TV revenues only rose by 4% and its Parks and Resorts revenues rose by only 8%.
Investors new to Disney stock often think of Disney as a movie studio. But it is first and foremost a TV studio, as the owner of the ABC network, the ESPN networks, and the Disney Channels, among others. TV revenues, at $5.1 billion for the quarter, made up 44% of total revenues. A year ago, it was 47%.
And herein lies a problem…