Don’t Buy Walt Disney Co (DIS) Stock Until ESPN Is “Fixed”

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As a long-time owner of Walt Disney Co (NYSE:DIS) shares, I watch earnings reports very closely. DIS stock has done very well for me over the years, though the past year or so has been the most difficult in recent history. The response to Q1’s earnings doesn’t look promising, either, as shares are trading flat in Wednesday’s early action.

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ESPN has been atop the list of Disney’s woes. And, wouldn’t you know it, that weighed on Disney earnings once again.

Today, I’m going to break down Disney’s fiscal first-quarter earnings report and see if I would still be bullish on DIS stock.

Disney Q1 Earnings

First, the spotlight numbers: Disney’s Q1 earnings came to $1.55 per share on $14.78 billion in revenue. The bottom line beat estimates of $1.49 per share, but the top line came short of expectations for $15.26 billion. Both metrics were down year-over-year.

However, one of the important things to recognize about Disney is that earnings reports can’t always be expected to show YOY EPS growth, because results are somewhat tied to the release of major media properties. That mostly means films like anything from Marvel, LucasFilm or Pixar. Still, there is often overlap, and generally speaking, looking at EPS from year-to-year in context with other information is a decent way to value Disney stock.

Media Networks: This division — which includes ESPN and all the other television networks — is where we always look first, because it account for about 45% of revenues. Revenue here fell 2% YOY to $6.23 billion. Operating income fell 4%, but that was led by ESPN in the Cable Networks division of Media Networks, which saw an 11% decrease in operating income to $864 million.

Disney is stuck a little bit here because programming costs are rising for the NBA and NFL, but advertising revenue is falling off as people cancel out of their subscriptions. And as I’ve written before, ESPN is doing itself no favors by skewing political.

Parks and Resorts: While lower attendance and occupied room nights were down, Disney compensated with higher ticket prices, food and beverage spending, and hotel room rates. Thus, segment operating income was up 13% on a 6% increase in revenues, to $1.11 billion. No complaints here.

Studio Entertainment: Revenue fell 7% to $2.52 billion, resulting in a 17% drop in operating income to $842 million. I’m not terribly concerned here because “Rogue One” had some mighty difficult comps to match on last year’s “Force Awakens”. This segment can fluctuate based on the timing of home video/streaming releases, which did occur this year.

Consumer Products and Interactive Media: Disney continues to struggle here, however. Revenue fell 23% to $1.47 billion and operating income fell 25% to $642 million.

Now, I’m not going to complain about $642 million in operating income. However, it’s this high because Disney shoved its merchandising into this division so that it could mask the lousy performance of Interactive Media. Disney has never figured out how to make their online stuff profitable. It just announced it was shutting down Club Penguin, and that’s on the heels of shutting down Toontown years ago.

What’s amazing is that private individuals launched an exact replica of Toontown by coding the whole thing themselves, and Disney is permitting it as long as it is free. How these folks manage to keep the darn thing running while Disney was seeing losses is a mystery.

Bottom Line for DIS Stock

Overall, I can’t quibble with a company earning almost $4 billion in operating income. But I can quibble with what’s happening at ESPN politically and operationally, and at interactive media. ESPN needs to get itself figured out, so Bob Iger needs to get involved here.

Bottom line is that Disney had $2.48 billion in net income, which was down from $2.88 billion last year. Operational cash flow was strong despite paying off $2.76 billion in accounts payable.

With about $9 billion in TTM net income, and DIS stock trading at 19 times forward earnings, and analysts pegging 10.9% annualized growth over the next five years … well, shares are expensive. That’s especially true when we factor in the net income decline this quarter and that ESPN woes continue.

I hold Disney stock, will continue to do so and advise others to do the same. I wouldn’t sell it as it remains the entertainment powerhouse of the world.

But if you’re looking for somewhere to sock away new money … DIS isn’t the place.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/dont-buy-walt-disney-co-dis-stock-espn-fixed/.

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