For Walt Disney Co (DIS) Stock, Bright Outlook Trumps Earnings Miss

Advertisement

It’s rare to see a stock get an after-hours bump on the direct heels of a fairly sizable earnings miss. But that was the case with DIS stock on Thursday.

DIS Stock: For Walt Disney Co, Bright Outlook Trumps Earnings Miss

Walt Disney Co (NYSE:DIS) earned $1.10 per share in its fiscal fourth quarter, shy of the $1.16 analysts had forecast. Sales were even worse at $13.14 billion, down from $13.51 billion a year ago and well shy of the $13.52 billion estimates.

But CEO Bob Iger saved the day by striking a decidedly upbeat tone about the next two years.

“Robust Growth” Spurring DIS Stock

He forecast modest EPS growth in 2017 and “more robust growth” in 2018 thanks to a growing digital presence, another “Star Wars” movie and the new theme park in Shanghai. That was enough to assuage concerned investors in DIS stock, which has fallen more than 20% at times in the past 18 months.

But they’re just words. Until Disney can slow the procession of ESPN cord cutters, upside potential in Disney stock is likely to be somewhat limited.

With people abandoning expensive cable TV in favor of piecing together cheaper digital streaming alternatives, ESPN has been bleeding customers of late; it lost 621,000 subscribers in October alone. The Worldwide Leader in Sports has reportedly lost 10 million subscribers since peaking at 99 million in 2013.

Fortunately, ESPN is just part of the Disney pie; its film studios are another, and right now they are thriving. In addition to last winter’s record-breaking “Star Wars” sequel (to which Disney now owns the rights), which grossed more than $2 billion at the worldwide box office, Disney’s film studios produced three other movies that topped $1 billion in sales in its 2016 fiscal year: “Captain America: Civil War,” “Finding Dory” and “Zootopia.”

“Doctor Strange,” its latest Marvel installment, could be well on its way to becoming a fifth; it grossed $340 million in its first week.

All told, Disney films grossed $7.5 billion at the box office last year — nearly matching the combined $8 billion the company paid for Marvel (in 2009) and the “Star Wars” franchise (in 2012)!

Those brilliant deals alone demonstrate that Disney knows what it’s doing, and along with the steady performance in its theme parks, they’re what’s propping the company up right now. But ESPN has been preventing Mickey Mouse from truly taking flight.

Media networks, which include ABC, The Disney Channel and FreeForm, are Disney’s largest division, accounting for more than half the company’s profits. ESPN is the biggest slice of Disney’s media network pie. Thus, when the biggest property in its largest division is losing more than 600,000 subscribers a month, it makes it extremely difficult for DIS to thrive no matter how well its other divisions are performing.

That’s where the switch to digital comes in. Disney’s recent purchase of streaming-video technology BAM Tech will allow the company to offer a lot of its media content and wildly popular movies online. A new streaming ESPN-branded subscription service is already in the works, and the company has plans to offer some of its other content to paid subscribers at some point in the near future.

If Disney stock can make the shift to digital without further damaging its TV business, then perhaps Iger’s sunny forecast for the next two years will carry some weight.

Disney Stock: Long-Term Buy, Short-Term Caution

Given Disney’s impressive foresight with the Marvel and Star Wars deals, it would be foolish to doubt them. In the long term, I think DIS stock will bounce back as the company figures out how to minimize its ESPN problem. Short term, Disney stock is already perking up a bit, having bounced off $90 support last month and breaking above its 50-day moving average this week.

You could start with a small position here, and add to it if the mass exodus among ESPN subscribers slows in November.

Bottom line: I would call DIS stock a strong long-term buy, and a very cautious short-term buy with the right position size.

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

More From InvestorPlace


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

©2024 InvestorPlace Media, LLC