With Walt Disney Co (NYSE:DIS) aiming to complete its merger with Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA), all eyes were on the FOXA stock earnings report. It’s difficult to make a big deal out of the latest reports, because when it comes to film and TV performance, results can vary widely from quarter to quarter.
FOXA stock did not have a spectacular quarter in the divisions that Disney is purchasing, though. And that begs the question: Should DIS shareholders be concerned?
FOXA stock did beat earnings for its 2018 Q2, and it’s actually the seventh-consecutive beat for FOXA stock. For media companies like FOXA, we look at “adjusted earnings from continuing operations,” which were $0.42, well ahead of the $0.36 consensus.
The entire FOXA operation did well, with revenues up 5% to $8.04 billion. Breaking things down by division, however, and we see that things were so-so in the divisions that DIS is acquiring.
Revenues for Cable Network Programming were the bright point for the DIS acquisition, up 11% to $4.4 billion. Cable struggled because sports programming costs rose, but ad revenue rose as well to more than offset it.
Filmed Entertainment revenues fell 1% to $2.25 billion. Film revenues are always topsy-turvy at every studio, based on staggered release dates and timing of when big franchise films get released. It’s not a concern, because Disney will fold all of Fox’s franchises into its own operations, and distribute films for maximum revenue. The TV segment saw a 5.8% decline in revenue to $1.8 billion.
For media companies like Twenty-First Century Fox, we look at segment operating income before depreciation and amortization (OIBDA) rather than an overall net income number. Media companies often have many one-time charges or gains in different areas, and it makes for the best apples-to-apples comparison from year-to-year.
Total OBIDA fell 28% to $1,44 billion. The good news was obviously at the cable network side, where it rose 2.6% to $1.37 billion. However, the increase was driven more by the international side than domestic.
Domestic only popped 1% because Fox News did really well, but that’s not being sold to Disney. Sports and National Geographic faltered. Ad rates fell 3%, but there was a 12% increase in affiliate revenues. The international side rose 8% thanks to STAR entertainment networks, and a 13% increase in affiliate revenues. Ad revenues also shot up 14%.
But OIBDA on the film side cratered 66% to $131 million. You can blame that on the high cost of releasing movies that don’t do very well. OIBDA on the TV side stunk up the joint as well, down 85% to $56 million. You can blame that on the sports cost increases.
Still, FOXA stock has $5.8 billion in cash behind it, with $19.16 billion in reasonably priced debt. It’s financially sound and that’s what matters the most.
The point of the merger doesn’t change, and that’s that Disney is going to get several franchises, some in partnership with Marvel, including Planet of the Apes, Alien, Kingsman, Deadpool, Maze Runner and all the Avatar films, and it owns the rights to the X-Men franchise. It will get all of the FOX network slate of shows, as well as those at FX, a 50% ownership of Endemol Shine, all of the National Geographic channels and an ownership in Hulu.
Content content content. That’s what wins in today’s world. There will be cost savings by merging these divisions with Disney’s and, frankly, Disney is better at film releasing than Fox has ever been. So don’t fret over these earnings results.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.