For consumers, Walt Disney Co (NYSE:DIS) still might bring to mind Mickey Mouse. But investors’ first thought generally is the company’s ESPN division. Concerns about that business are a key reason why Disney stock has been range-bound for nearly three years now.
The reaction to Disney’s Q1 earnings report on Tuesday afternoon shows little has changed. Disney’s parks and studio businesses both had impressive quarters. And DIS announced the rollout of a $5-per-month standalone streaming service for ESPN, in an effort to tackle steady subscriber losses. Yet DIS stock, despite an earnings beat, has barely budged, climbing less than 1% in early trading.
Disney stock is a “battlefield stock”, as Dana Blankenhorn put it ahead of earnings. The Q1 report does little to change that. I’ve long taken the bearish side when it comes to Disney stock, and from here, Q1 suggests recent trends should continue. Admittedly, some of Disney’s businesses are performing well. But even at a modest valuation, they’re still not performing well enough to break the stock out of its range.
DIS Stock and Q1 Earnings
Disney did post a nice headline beat on the bottom line: adjusted earnings-per-share of $1.89 came in $0.28 ahead of consensus. Revenue was a bit light, growing 4%, almost a point lower than Street expectations.
At the segment level, the news was mixed in much the same way as it has been for the last 10-12 quarters. Media Networks revenue was flat, with Cable Networks up 1% and Broadcasting down 3%.
ESPN subscriber losses continue, and overall subscribers fell 3%. ESPN’s ad revenue fell a concerning 11%, with four points of the pressure coming from calendar shifts around the College Football Playoff. ABC ad sales dropped as well despite better pricing. There’s little to suggest any moderation in the fears about viewer defections to Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and other streaming options (including Hulu, of which Disney owns 30%).
Elsewhere, though, the news was much better. Parks and Resorts revenue rose 13%; operating income jumped 21%. The Parks business actually out-earned the Media Networks business in the quarter, an interesting shift for Disney stock. (Seasonality helps, as the parks see higher visitation in the fourth quarter.)
Studio Entertainment revenue and profit dropped modestly, due mostly to comparisons in the movie business. Sales in the smaller Consumer Products segment dropped 2%, and operating income fell 4%, due mostly to timing and currency.
At the segment level, the results leave the story here little-changed. And I still don’t think that story is attractive enough. All told, revenue was flat, and segment-level operating income rose just 1%. What EPS growth Disney posted came mostly from taxes — and its tax rate won’t be cut every year.
Is Disney Stock A Buy?
I wrote back in November that I thought DIS stock had trouble ahead. With Disney stock back at roughly the same level, my opinion hasn’t changed. The Media Networks business still generates over 40% of segment-level profit, and it’s in trouble.
Affiliate fee revenues are rising only because of prices negotiated in previous years. Cable operators like Comcast Corporation (NASDAQ:CMCSA) and Charter Communications Inc. (NASDAQ:CHTR) likely will take a harder line during the next round of negotiations. The $4.99 price for ESPN’s standalone service still suggests a decrease in per-subscriber revenue (depending on how ad revenue shakes out). More importantly, ESPN’s long-running benefit — getting $8-9 per month from every cable and satellite subscriber, even those who don’t watch its networks — is going away.
And I’m skeptical the acquisition of assets from Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA) changes the trajectory much. It’s a smart deal for Disney, assuming it gains regulatory approval. But it’s not a purchase that is going to accelerate long-term growth.
There are risks elsewhere, too. Notably, the Studio Entertainment business is becoming heavily reliant on Marvel superhero movies and Star Wars. Four Marvel movies are coming out just this year, along with the standalone Han Solo film. If consumers get tired of superheros, in particular, that segment will weaken. The Consumer Products business has been stagnant for years now. Parks is performing well, but it alone can’t drive Disney stock.
At barely 15x forward EPS, it’s not as if DIS stock is pricing in torrid growth. But from a long-term profit standpoint, I’m skeptical it can drive much, if any, growth. The cord-cutting trend, and the associated subscriber losses, will continue for years. There’s not enough elsewhere to offset that problem. The Q1 earnings report didn’t change that argument. In fact, from here, it strengthened it.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.