Walt Disney Co (NYSE:DIS) has, over the years, put together an awesome array of talent and remained independent, building its market capitalization to $167 billion. Everything from Marvel superheroes to Pixar’s cartoon heroes to ESPN’s sport stars and the Muppets work to push DIS stock forward, as CEO Robert Iger has specialized in squeezing the last ounce of revenue and profit from their efforts.
Disney’s average analyst rating going into Tuesday night’s fiscal third-quarter earnings report was “overweight,” with most expecting a solid beat on the expected $1.53 per share in earnings, on $14.6 billion in revenue.
The actual results were mixed.
Disney brought in $14.24 billion in revenue, filtering down to an adjusted $1.58 per share of DIS stock, so a top-line miss but a bottom-line beat. Moreover, those revenues were fractionally lower than the year-ago period, while net income of $2.37 billion was about 9% worse. The problems were mostly related to cable and broadcasting, where profits were down 23%.
But the big news of the day wasn’t its fundamental shortcomings. Instead, it was Disney’s announcement major moves to solve those problems, which CEO Bob Iger called “a big strategic shift.”
Disney announced that it will start ESPN subscription streaming services through an existing app next year, and it will pull its movies from Netflix, Inc. (NASDAQ:NFLX) starting in 2019 so it can stream them directly through a Disney-branded service. It also is buying the rest of BAMTech — a company that can handle both user registrations and ad technology it had previously invested in — with the 42% stake costing $1.58 billion.
Traders responded by selling DIS stock off to the tune of 3% in Tuesday’s after-hours trade — slightly less than the 4% dip in Netflix shares.
Trouble in the Mouse House
Going into earnings, InvestorPlace writers disagreed on the depth of the company’s problems. Jonathan Berr thought that fewer foreign tourists coming to Disney’s U.S. parks could spell trouble. Chris MacDonald disagreed, calling the stock a great long-term play.
For those fearing another recession, it should be noted that DIS did a good job getting through the 2008 financial crisis, maintaining its dividend. That payout has more than doubled since, and is delivered twice a year, but with a yield of just 1.46%, Disney stock remains a capital gains play.
Recently, however, questions surrounding ESPN and other cable assets have pulled Disney off its perch as the golden ticket of entertainment. Lack of top-line growth has sent shares’ price-to-earnings ratio to a market matching 18.6, as shares had fallen about 8% from April highs prior to Tuesday’s report.
Along the way, Disney has become a proxy for the U.S. consumer economy. Disney has its hands in every form of entertainment, from TV to movies, streaming to toys, from theme parks to cruise lines.
If Disney is in trouble, then, is America in trouble?
What’s Next for DIS Stock?
With Time Warner Inc (NYSE:TWX) in the process of being snapped up by AT&T Inc. (NYSE:T), with Comcast Corporation (NASDAQ:CMCSA) having swallowed NBC Universal, and with Verizon Communications Inc. (NYSE:VZ) being pressed to buy more content, Disney’s very independence has come into question.
It’s not just the cable giants that could make a move, but streaming giant Amazon.com, Inc. (NASDAQ:AMZN), now worth two-and-a-half times what Disney is; Facebook Inc (NASDAQ:FB), which could combine Disney content with its cloud to get into streaming against Netflix; and even Apple Inc. (NASDAQ:AAPL), which could actually buy Disney for cash.
Failure to solve its cable ratings problems would increase pressure to do something drastic, like sell ESPN. It’s a jewel in the sports crown, but one that badly needs a streaming strategy and network power to execute to stay on top. So, for that matter, do the other cable and broadcast channels, which represent the trouble spot in Disney’s recent results.
In its second-quarter report, for instance, media networks including ESPN, ABC and the Disney channel represented nearly 50% of total revenue, parks and resorts about one-third of revenue, and movies just one-sixth of revenue, with consumer products like toys making up the rest.
The longer the problems in this area fester, the longer Disney stock will remain stuck in neutral.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN and FB.