Walt Disney Co (DIS) Stock May Get Slammed by Earnings Yet Again

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Walt Disney Co (NYSE:DIS) is crushing it at the box office this year, but when DIS posts earnings next week, you can bet that the effects of cord-cutting take the spotlight. That’s sour news if you hold Disney stock.

Walt Disney Co (DIS) Stock May Get Slammed by Earnings Yet Again

To be fair, it will be a joyous quarterly report by some measures. Disney is on the cusp of breaking the industry’s record for annual box office revenues. “Zootopia,” “Captain America: Civil War” and “Finding Dory” were all huge hits. “Doctor Strange” is running strong, and there are high expectations for upcoming releases such as “Moana” and “Rogue One: A Star Wars Story.”

Disney Stock Is More Than Movies

The problem is that DIS is much more than a movie studio. It’s closer to an entertainment conglomerate. Divisions like broadcast, cable, amusement parks and consumer products have to pull their weight as well.

Especially the segment known as media networks. It’s the business that accounts for the lion’s share of revenue and operating profit. For the three months ended July 27, the segment delivered more operating income than studio entertainment, parks and resorts, studio entertainment, consumer products and interactive media combined.

A lot of the segment’s success stems from the fact that it includes the cash cow that is ESPN. The trouble is that the sports network is losing subscribers to cord-cutting.

To get a sense of how the ESPN tail wags the dog, check out second-quarter earnings. For the three months ended July 27, media networks revenue grew just 2%. Operating income was essentially flat. Disney said results there were driven by ESPN.

It’s not just that the pre-eminent sports network is losing subscribers … it’s that it’s losing them at a rapid rate. Although Nielsen retracted a report showing stunning subscriber losses following a dispute with Disney, the trend described remains correct.

ESPN’s subscriber numbers peaked five years ago at around 100 million. Today they’re expected to finish 2016 in the high-eighty millions. That’s a huge hit to revenue when EPSN gets an estimated $7.21 per subscriber. That’s leaps and bounds beyond what it can charge cable operators for other networks, according to market research firms like SNL Kagan.

TNT costs $1.76 a subscriber. Fox Sports One goes for less than a dollar. CNN has a price of around 71 cents a subscriber.

DIS Stock Isn’t a Value Yet

Nothing compares with the value advertisers place on ESPN. That’s why no matter how well Disney’s other divisions perform, the market can’t take its focus off the network.

Shares in DIS are off more than 12% for the year-to-date. The stock had a steep and prolonged uptrend starting in February but then it released second-quarter earnings. It has been a story of lower lows and lower highs ever since. The way Disney stock moves on earnings news gives Thursday’s release a lot of potential for drama.

Expectations are everything on Wall Street, so the view that DIS will post flat revenue growth and a drop in earnings per share should already be baked into the share price. However, the top- and bottom-line numbers still suggest stagnation. Earnings per share is forecast to drop to $1.16 a share from $1.20 a share a year ago, according to a poll by Thomson Reuters. Revenue isn’t projected to budge much off of $13.5 billion.

Even if DIS delivers the Street’s favorite meal of a beat-and-raise quarter, anything negative connected to ESPN has the potential to spark a selloff. We’ve seen it before.

On the plus side, the grinding down of the Disney stock price has made the valuation much more attractive. On a trailing earnings basis, shares change hands at about 17 times earnings. A year ago it was closer to 25.

At some point, DIS stock is probably going to make sense as a value pick. For now, however, it’s being held hostage by all-new ways to consume media. There’s nothing wrong with waiting for a more confident entry point.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/walt-disney-co-dis-stock-earnings-ipmedia/.

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