Walt Disney Co (NYSE:DIS) is off more than 2% on Wednesday morning after the company’s fiscal second-quarter financial report Tuesday night failed to impress Wall Street. While Disney earnings of $1.50 per share came in 9 cents higher than the consensus, revenues of $13.34 billion were slightly below estimates for $13.45 billion, thanks in large part to the ESPN unit. A few DIS stock holders unsurprisingly walked to the exits in response.
This morning, we’ll look at some of the details of this earnings release, and how these results should impact investors’ decision making on Disney stock moving forward.
Disney Parks & Resorts Post Excellent Performance
Disney’s parks & resorts segment performed very well this quarter, growing revenues on the order of 9% year-over-year to $4.3 billion, performing better than analyst expectations. Operating income for this segment increased substantially, on the order of 20%, spurring investor confidence in the Disney brand and its theme parks located around the world.
With Disney’s new theme park in Shanghai now contributing a significant portion of revenue to this segment, investors bullish on the stock have pointed to the theme park segment as one of the main investment theses for Disney.
The theme park segment is expected to account for approximately two-thirds of the business’ growth in earnings over the coming years, driven primarily from increased traffic to its international locations.
Studio Entertainment Remains Strong
Studio entertainment is always good for propping up DIS stock based on hype, but the results are there, too.
This division outperformed in Q2, with Beauty and the Beast driving operating income for this segment, which was up 21% this past quarter on a year-over-year basis. Expected operating income for this segment was $528 million; however, the company posted significantly higher operating income of $656 million in the quarter.
The Disney blockbuster Beauty and the Beast posted sales over $1 billion in the global box office, providing the company with a significant boos in this segment this quarter. Disney has a number of movies in the pipeline, including the new Pirates of the Caribbean movie which is slated to be released this quarter.
ESPN Weighs on Results
One of the key business segments investors and analysts have been eager to analyze for Disney is its cable media networks portfolio, which includes the troubled ESPN — perhaps the single biggest drag on DIS stock at the moment.
This segment saw a 3% rise in revenue and a 3% decline in operating income year-over-year, largely in line with expectations of pervasive weakness in the traditional media segment moving forward.
The decrease at ESPN has been linked to higher programming costs partially offset by affiliate and advertising revenue growth, though Disney CEO Bob Iger has remained bullish on the media segment. Iger suggested that the significant growth seen in the subscriber base of its streaming services and Disney-related channels on platforms such as Hulu are starting to fill the gap for the company, which has been experiencing declines in revenue and operating income from the traditional cable segments of late.
That said, on Tuesday, Iger noted on a call with analysts that streaming services and online media — which are beginning to take hold — still comprise a small percentage of the overall business.
These services “are a small part of the pay TV universe, but we believe they’ll be a much bigger part of the business going forward. And from a per sub pricing standpoint, these new services are just as valuable to us as traditional platforms.”
He also stated that he believes it will take time for these streaming services to become true alternatives to traditional paid television, saying “so far, it’s not enough to make up for some of the losses on traditional (TV platforms),” suggesting to investors that the potential for the traditional media segment to weight on earnings in the future remains highly likely.
Bottom Line on DIS Stock
Disney is a company with a fantastic brand and an existing infrastructure of productive assets that will continue to drive increased profitability in the quarter.
While the company’s traditional media segment may weigh on earnings for some time to come, the company’s strategic move into online streaming services should provide a significant buffer. For investors considering a long-term position in DIS stock, don’t be dissuaded by Tuesday’s lackluster results.
As of this writing, Chris MacDonald did not hold a position in any of the aforementioned securities.
