Walt Disney Co (NYSE:DIS) will release its second-quarter earnings report Tuesday, and the markets couldn’t be more perplexed. While the iconic entertainment giant usually fires on virtually all cylinders, Disney stock has one unfortunate liability. I speak of course about ESPN and its ratings disaster.
The once-revered sports channel has been facing a crisis that apparently has no great solution. To get an idea of the problem’s scope for DIS stock, ESPN television viewership peaked during the spring of 2011. That time period is almost enough for the average student to complete high school and get a bachelor’s degree.
It’s no wonder that Disney stock has underperformed this year. Rarely has ESPN gained TV viewership from one season to another. I suppose that the only saving grace is that the decline has been a “controlled” bleed. From its peak to the spring season of 2017, ESPN lost 12.6% in viewership, or a little less than a 2% decline annually.
But that’s not the only ESPN-related dilemma for Walt Disney Co stock. Our own Joseph Hargett writes, “Disney’s former cash cow has hemorrhaged subscribers for the past year, and online ESPN streaming revenue isn’t making up the difference fast enough. If Disney can offer up any positive news on its broadcast and ESPN units, DIS stock will soar.”
Of course, Hargett is quick to point out that the ESPN situation is a big “if.” Should the company again provide disappointing figures, Disney stock is liable to fall. Moreover, the cord-cutting phenomenon has deeply impacted media companies like Comcast Corporation (NASDAQ:CMCSA).
Predictably, many don’t expect DIS stock to fare better in the traditional broadcasting space. To add insult to injury, Disney faces a tough outing no matter what it delivers for its upcoming earnings report.
Don’t Overreact to Disney Stock
Given the company’s market declines this year, I consider Disney stock as a great long-term pickup. Few companies leverage so many culturally and internationally-recognized assets. This is a name that both young and old can utilize in their investment strategies.
With that said, you don’t want to overreact to whatever happens in the Q2 earnings report. Chances are you’re going to see more of the same — that is, several weeks of sideways trading before Walt Disney Co stock creeps higher.
For Q2, covering analysts have reasonable expectations for the company. Consensus earnings per share target is pegged at $1.70. This is near the high end of the estimate spectrum, which ranges from $1.54 to $1.76. In the year-ago quarter, EPS was $1.41, and the actuals came in at $1.50.
A significant factor working in favor for DIS stock is historical earnings performances. Going back to Q1 2015, the entertainment firm has only missed three times. More importantly, the misses are small, averaging a 4.45% negative earnings surprise.
On the flipside, the beats are much larger in scope. The positive earnings surprise averages 8%. Granted, past performance is no guarantee of future success. However, this is a fairly large sample size. If I had to gamble, I’d bet that Disney stock will at least meet expectations.
Since Q1 2015, equity returns average nearly a 1% loss a month after earnings release. Nor is beating EPS forecasts an indicator for market success. When Disney beat, Disney stock averaged 1.8% losses a month afterwards.
Therefore, I recommend not getting too carried away with the Q2 results. DIS stock is a long-term investment, not a speculative gamble.
Disney Stock Remains a Great Value
Regardless of its ESPN woes, I still believe in DIS stock. With enough time, the “Magic Kingdom” has significantly more upside potential than downside risk.
For starters, the ESPN situation isn’t as hopeless as it might appear. McKinsey & Company’s Dan Singer makes a compelling argument that sports viewership and consumption is as robust as ever. The problem is how companies approach their audience. Rather than segmenting people by age, a better metric is gender, or whether an individual has children.
In other words, both young and old love sports, and therefore, revenue conversion opportunities exist. The trick is to find a proper way to communicate with the younger generation.
Second, let’s talk about Disney’s incomparable asset portfolio. Hargett mentions that the Disney-owned Marvel’s Avengers: Infinity War is forecasted to hit $1 billion in global sales. Also, the highly anticipated Solo: A Star Wars Story could have an opening weekend $160-170 million haul.
The slowdown in Walt Disney Co stock is temporary. Despite some hiccups, the company has too many positives to overlook.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
