Investors in Walt Disney (DIS) stock sure don’t want a repeat of the last time Disney earnings hit the tape, as cord-cutting worries caused Disney stock — and the rest of the media sector — to crash.
Disney earnings should beat Wall Street estimates when it reports after market close on Thursday — they always do — but that won’t matter if troubles at the cash-cow of ESPN grab all the attention again.
And, boy, are those troubles mounting. ESPN just cut 4% of its workforce in order to control costs. The problem for ESPN — and the satellite and cable industries — is that the number of cable subscribers is in decline, and even those who do keep cable are opting for cheaper packages that don’t include the sports channel.
At the same time, ESPN is paying eye-popping amounts of money for the rights to live sports programming. Sure, ESPN is still very profitable, but the trend is not its friend.
That trend has investors rightly concerned about what this all means for Disney earnings over the longer term. As much as its blockbuster movies may get all the glory, the media networks are more important to results.
Although ABC, the Disney Channel, Disney Family and A&E are certainly not unimportant, EPSN is central to the segment that accounted for 42% of revenue last year. And it’s even more important to the bottom line.
Yes, Disney earnings and Disney stock are much more than just ESPN, but it’s a big part of the media network’s outsized contribution to Disney earnings. Indeed, media networks generated more operating profit than parks and resorts, studio entertainment, consumer products and interactive combined.
That’s why Disney stock plunged nearly 14% in August when the market decided cord-cutting was accelerating faster than it initially thought. And as much as the selloff may have been overdone, it’s going to remain a headwind — and be very much in focus — when Disney earnings come out.
Disney Stock Is Solid, but Pricey
On the plus side, the parks and resorts segment has enjoyed 16% growth in operating profit through the first nine months of the year and continues to show strength on the back of a better U.S. economy. Consumer products and studio entertainment were already having a good year and they’ll get a huge boost from the release of the new Star Wars film, which is expected to compete for highest-grossing movie of all time.
Heck, in the short term, there’s a lot to like about Disney stock. Analysts, on average, expect Disney earnings to climb to $1.14 per share from 89 cents a year ago, according to a survey by Thomson Reuters. Revenue is expected to rise 9.4%, which is no small feat in an earnings season when top-line gains are so hard to come by.
Rather, the issue with Disney stock is valuation. Shares trade at a big premium to their own five-year average on a forward earnings basis, and well above the S&P 500.
Some of that may be attributable to Star Wars hype, and hype is always a dangerous thing for a stock. It’s also not clear that the market respects the risks in media networks as much as it should. Look at the panic that ensued after the last Disney earnings report.
With a market-crushing gain of 22% for the year-to-date, Disney stock could get slammed on earnings and still be a big winner this year. But putting new money to work now — at the height of stock buyback and window dressing season — might not be the best idea.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
