Walt Disney (DIS) reported earnings after the bell Tuesday, and while Disney stock holders were hoping for a fairytale-like report, what they got was a horror show.
Yes, earnings and revenue rose, but Disney’s numbers disappointed more than they pleasantly surprised, and the forward-looking picture wasn’t that great, either.
The short: DIS revenues increased 5% to $13.1 billion on earnings that grew 13% to $1.45 per share. The former mark fell short of a $13.23 billion analyst estimate, while the latter just cleared Wall Street’s bar of $1.42.
And while Disney doesn’t actually provide detailed guidance, executives did try to mute expectations for growth in its television subscriber numbers.
That’s a lot of bad news, yes, but there’s good news too: A rare bout of aggressive selling has given investors a slight discount in what’s overall a solid longer-term play.
ESPN — A Losing Hand?
During the conference call with CEO Bob Iger, investors focused almost entirely on the fall in ESPN subscribers, Disney’s biggest broadcast network.
In the real world, TV consumers want to opt in directly though digital platforms to their favorite channels. What they don’t want is to be forced to purchase an entire (perhaps unnecessary) package. Iger’s insistence on playing ESPN the old-school way — as part of an entire package offered through cable — has troubled investors, leaving them with the impression that management is in denial.
It’s easy to be captivated by investors’ disappointment and easier still to turn downbeat on Disney stock. Especially, if all you’re doing is focusing solely on the ESPN channel. Yet analysts criticizing that old-school approach might be missing Bob Iger’s point.
To me, Iger’s clear message was that ESPN is in a cyclical downturn — one caused by higher production costs, stagnant ad revenue, and yes, a falling subscriber base. Disney could offer ESPN through a direct digital platform, without the deals it currently has with cable providers. But then ESPN would be left to weather the storm on its own merit, which would leave it more vulnerable than it already is.
In its current structure — where ESPN is part of a bigger package alongside better-performing channels — ESPN is protected from some downside. If it were me, I’d probably focus on doing just that.
That’s what Bob Iger is doing for Disney stock holders.
Disney Stock: The Bigger Picture
It’s hard to completely ignore ESPN’s woes, as they’re the lion’s share of the company’s cable network earnings. Still, investors should be heartened by Disney’s adherence to its core strategy: Great content produces the best returns over time.
This is especially true for a company like Disney that has the ability to leverage its content across the board through theme parks, merchandise and even media. And by great content, of course we mean the company’s movie business, which is set to grow robustly.
With Marvel and now Lucasfilm under its belt, Disney is set for a strong stream of blockbusters, from the epic Star Wars release this December to the latest Avengers movie.
Just how big are those two brands under Disney? According to the website Box Office Mojo, an affiliate of IMDB, Disney’s share of box office sales (via Buena Vista) was just 11.6% when it acquired Marvel and its lineup of superheroes. Now? It’s at 20%. The Marvel brand clearly translates into tangible market share.
And we haven’t even gotten the windfall from the upcoming Star Wars: The Force Awakens — the first cherry that DIS gets to pick from this high-profile acquisition. Star Wars: Revenge of the Sith cost $115 million to produce but reeled in $850 million worldwide at the box office, or profits of more than 600%. (That’s juuuuuuuust a bit better than the average movie.)
Disney stock is suddenly looking better on a valuation basis, trading at less than 20 times next year’s earnings and at a price/earnings-to-growth ratio of 1.6. Yes, neither are screaming “bargain!” but both are better than we’ve seen in DIS for a while.
While ESPN is a worrisome point for Disney, the media machine — movies to merchandise and parks — is cranking into high gear. That makes the latest selloff in Disney stock a buying opportunity to me.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
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