It has been almost exactly one year since Walt Disney Co (NYSE:DIS) shares tanked on a slowdown at ESPN, and Tuesday’s DIS earnings report is likely to reveal more weakness in this critical business.
Media networks is DIS’s largest segment and it’s driven by contributions from cable. In turn, the cable networks business is really the story of ESPN.
But cord-cutting and skinny bundles are causing subscriber woes at the sports network, and that’s taking a bite out of any positive sentiment on DIS stock.
Indeed, Disney stock actually rebounded nicely in the months following 2015’s collapse. Then the reality of ESPN’s impact took hold. The DIS stock price is back to where it was at the nadir of last year’s selloff. On a 52-week basis, Disney stock is off nearly 14%.
Theoretically, the slowdown at ESPN should be adequately discounted in the Disney stock price by now, but that won’t matter in the immediate aftermath of Disney earnings. Some analysts say media networks will be lucky to show operating profit growth of 1%. Even if it manages to exceed those estimates, it’s still looking at a pretty “meh” quarter of profit growth in its most important business.
DIS has some other expected weaknesses. The ABC broadcasting division routinely finds itself in the back of the pack when measuring network ratings. As a result, operating income from the wider broadcasting segment will likely go into reverse year-over-year.
There are some bright spots, however. The success of movies such as Captain America: Civil War, The Jungle Book and Finding Dory should power strong growth in the segment’s top and bottom line. And that’s after the tremendous flop that was Alice: Through The Looking Glass.
DIS Stock Is a Hold
Disney stock bulls can take pride in what’s expected to be an outstanding quarter at the box office. The problem is that it’s a relatively small part of the total DIS pie. In the previous quarter, media networks booked an operating profit of $2.3 billion. As for studio entertainment, the bottom line came to not quite half-a-billion dollars (It’s also going to face tougher comparisons at this time next year).
Parks and recreation should also extend what has been a nice run of operating profit growth, but that’s not going to push concerns about the cable networks into the background.
For the most recent quarter, analysts on average forecast Disney earnings per share to increase to $1.61 from $1.45 a year ago, according to Thomson Reuters. Revenue is projected to rise 8% to $14.2 billion. That’s not bad at all, but the vibe is that DIS could disappoint.
It’s far too early to get bearish on DIS stock, but it’s hard to call it a buy, too. Just look at Wall Street, which is pretty evenly split. Of the 32 analysts covering Disney, 14 have it at buy, 17 call it a hold and one says sell.
Likewise, the valuation looks fairly balanced. The price-to-earnings ratio of almost 16 offers only a slight discount to its five-year average. It also seems pretty fair given the long-term growth rate of 10% per annum.
Perhaps DIS will deliver an upside surprise, but that’s not going to offset worries about the demographic shift in how viewers consume TV. That fear alone sets shares up for underperformance.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
