Walt Disney Co (DIS) reported fiscal second-quarter earnings on Tuesday after trading hours, and the result was a rare miss that sent DIS stock groaning in Wednesday’s trading.
Disney posted a 4% rise in revenues to $13 billion and a slight uptick in earnings to $1.36 per share, but both numbers fell short of Wall Street expectations for $13.2 billion and $1.40 per share, respectively.
Performance in all segments except Studio Entertainment missed analysts’ expectations as well.
But despite the general feeling of doom and gloom around Disney this morning, DIS stock holders have a few reasons to take heart — and new money should actually consider watching Disney closely from here.
Where Did Disney REALLY Disappoint?
The biggest fear looming for Disney stock was the potential weakness from Media Networks, given the continued fall in revenue of its ESPN division — the biggest subsidiary in Media. And lo and behold, revenues in the segment did, at $5.8 billion, fall just shy of expectations, as did operating income of $2.3 billion.
However, that income was higher by 9% year-over-year, and that came on lower programming costs — something that had hampered the segment in previous quarters.
No, Media Networks has been the company’s Achilles heel, so the bar there wasn’t set that high — but the hope was that the other segments would compensate, and they didn’t.
Parks and Resorts was a miss, bringing in $3.93 billion in sales versus $4 billion expected. Consumer Products and Interactive Media (which includes gaming) and Disney consumer goods segment was also weak, falling 2% year-over-year.
The only bright light was the Studio Entertainment segment, which beat estimates with $2 billion in revs, thanks to hits such as Star Wars: The Force Awakens and Zootopia.
But those blockbusters were simply not enough to offset the overall softness in Disney.
Why DIS Stock Is Fine
Although the results are under the Street’s consensus, they should be taken in perspective.
Earnings per share for the first six months of the fiscal year hit $3.04, which is up 22% from the year-ago period. That’s also much higher than Disney’s five-year average annual EPS growth rate of 19%.
With Disneyland Shanghai coming into play in the next quarter and even more impressive lineups in the studio business, the EPS growth pace is likely to remain above average.
Investors are simply nervous because the miss in earnings means that any disappointment in Q3 earnings, especially from the highly anticipated Disneyland Shanghai, could hit the stock so hard it could have difficulty recovering.
Not to mention, the miss itself was the company’s first in five years, which was bound to shake up confidence just a bit.
And don’t forget that DIS shares had run up more than 15% from their February lows. Today’s -5% open is merely offsetting gains from the past week, and then only a little extra.
Disney clearly is making progress toward shoring up its ESPN division, its films continue to dominate (Captain America: Civil War will certainly help Q3 results), and the hype machine is about to get rolling as Disneyland Shanghai’s mid-June opening date nears.
Expect investors’ nerves to be calmed sooner than later, and the DIS stock recovery will be on its way.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
