It has been another earnings season of big winners and even bigger losers, with Walt Disney Co (DIS) being the latest name to get caught up in the storm.
The company reported earnings and revenue that came in shy of consensus for the first time in five years on Tuesday, and the stock is now getting buried in a blizzard of selling.
In many ways it’s actually remarkable, as Disney is a force of nature that has been able to overcome plenty of obstacles and limits in the past.
Adjusted earnings of $1.36 a share in DIS stock missed estimates of $1.40 a share, and revenue, which grew 4% to $12.97 billion in the quarter, was short of expectations just above $13.2 billion. The stock fell more than 5% in after-hours trading and continued its decline throughout the day on Wednesday.
DIS Stock by the Numbers
| Disney (DIS) Fiscal Second Quarter |
Result | Percent Change |
| Revenue | $12.969 billion | +4% |
| Operating Income | $3.822 billion | +10% |
Let’s take a look at the quarter in terms of each of Disney’s business segments. We’ll start with its Media Networks unit, which is the largest business division and runs the company’s various television networks, including ABC and ESPN.
ESPN is the main focus here. The channel that started out airing Australian Rules football now has just about every angle of the sports world covered, but they’re finally starting to realize that such a breadth of coverage is expensive. And on top of that, mainstream cable has been under assault recently as more and more viewing options come on the market and gain popularity, especially with millennials.
| Media Networks Segment | Result | Percent Change |
| Revenue | $5.793 billion | -0.3% |
| Operating Income | $2.299 billion | +9% |
There’s no doubt that Disney has to find solutions that go beyond so-called “skinny bundling” to a direct-to-consumer model or a la carte option, but it all comes down to pricing and how the delivery bit will be worked out. The cord-cutting revolution is real, but the pace and ultimate carnage is widely exaggerated.
Be that as it may, until the industry fights back with plans that assuage the doubters and mavens, the worst-case assumptions will continue to rule the day.
Cable revenue fell 2% to $3.95 billion, but operating income improved 12%. Broadcast revenue gained 3% to $1.83 billion while operating income fell 8%. Results were impacted by the fact that ESPN aired only one college football playoff game, as compared to seven last year.
The Parks & Resorts business segment was mostly held up by a strong domestic market, as foreign currency issues led to weaker-than-expected overseas results. Still, Disney’s parks remain extremely popular, and there seems to be enough pricing power to mitigate slower periods of attendance. Overall, this is a solid business with room to grow, and the company is doing just that with its newest theme park, Shanghai Disney Resort, set to open this summer.
| Parks & Resorts Segment | Result | Percent Change |
| Revenue | $3.929 billion | +4% |
| Operating Income | $624 million | +10% |
The Studio Entertainment unit is sizzling with its back-to-back-to-back hits powered by the super hero craze and a continuation of the Star Wars franchise.
CEO Robert Iger was clearly angry that DIS stock analysts didn’t even bother to ask about this division, but the fact remains that this is a juggernaut now and for the foreseeable future.
| Studio Entertainment Segment | Result | Percent Change |
| Revenue | $2.062 billion | +22% |
| Operating Income | $542 million | +27% |
And last is the Consumer Products & Interactive Media segment, which clearly saw a disappointing quarter. Revenue fell 2% as consumers finally slowed their buying of Frozen merchandise, but the weakness especially stung as we saw Electronic Arts Inc. (EA) soar because of the success of its Star Wars game.
| Consumer Products & Interactive Media Segment | Result | Percent Change |
| Revenue | $1.186 billion | -2% |
| Operating Income | $357 million | -8% |
The bottom line is that Disney is a victim of its own success, although it still has to convince investors that it has all the answers. As a result, I think management needs to be more proactive in terms of communication, and also has to make moves that keep pace with the technology that’s changing the way consumers view and interact with media and entertainment.
I’d also like to hear more on succession.
Taking a look at the stock specifically, it isn’t exactly cheap but there’s no urgency for value investors to load up on the shares. The chart above shows DIS stock tumbling after forming a perfect double top in 2015. It has bounced from the lowest levels, but now must hold above $100 or it could be vulnerable to a move back below $95.
In the end, I think the stock is already oversold and the Street is too critical of it. I don’t think the ride back up is going to be smooth, but could be worthwhile to a long-term investor willing to handle the volatility.
From a trading perspective, a narrow range between $100 and $106 might be tradeable. However, I’d feel more confident buying the stock after a move through $106 on better-than-average volume.
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