Walt Disney Co. (NYSE:DIS) looks set to beat earnings estimates when it reports its first quarter results on May 8, and the Disney stock is holding the $100 per share level.
Credit superheroes, like Black Panther and now Avengers: Infinity War, tent-pole movies that are bringing in billions of dollars at the box office, for exciting investors.
But the shares are still down 12% over the last year, against the Dow Jones’ gain of 15%, because the real heroes of the sports fields, on ESPN, remain a financial drag. The possible cost of a long, drawn-out fight for Sky plc (OTCMKTS:SKYAY) against Comcast Corp. (NASDAQ:CMCSA) isn’t helping either.
A deal with Twitter Inc. (NASDAQ:TWTR) to create shows and ad sales on that platform should help, but the future remains uncertain, as its ESPN+ streaming service debuts.
Short-Term vs. Long-Term
Disney’s short-term future does seem bright, but movies remain a small part of the company — and ESPN isn’t the only entertainment network that needs a digital boost.
Kids are no longer watching cable TV and that spells big trouble for Disney’s biggest division, which is Media Networks.
As its first quarter report, released in February, makes clear, media networks are still over 40% of the company’s total business. It’s a no-growth zone, and profits have been falling.
While most of the attention has been on ESPN, other cable networks, like Disney Channel and A&E, are following it down the drain, with profits down 25%. Disney had been associating start-up costs at BAMTech, the unit due to run its streaming services, with its cable networks, but in in the first quarter it said there were no losses there.
Cord-cutting changes the entertainment business model. Viewers no longer watch networks, they watch shows. Except for sports, there’s no longer such a thing as “appointment television”. Ratings continue to decline for ABC — down 9% so far this year, 11% in the key demographic advertisers crave.
The fall of networks means the old syndication business is no longer what it was, because those deals were made with smaller broadcasters and cable channels.
The long-term problems for Disney, in other words, are getting worse.
Parks Remain Strong
If it were not for ESPN and the resorts business, Disney would just be a combination of Viacom Inc. (NASDAQ:VIAB) and CBS Inc. (NYSE:CBS), which are trying to merge but are worth a combined $30 billion, against $150 billion for Disney.
Resorts are now the star of Disney’s show. They brought in nearly $5.2 billion of revenue during the last quarter, up 13%, and profits of $1.35 billion were up 21%. They could pass media networks and become the largest division within a year.
Disney is now adding attractions that go beyond the parks, like a Toy Story-themed airplane, taking tourists to the Shanghai Disney Resort, or a Bourbon Train for adult guests in Florida.
Gone are the days when Disney had to make up ideas for the resorts. The addition of Star Wars and Marvel themes gives the parks an enormous runway.
The Bottom Line on DIS Stock
Despite the success of its tent-pole movies, Disney is in a financial valley, and investors have been right to lighten up.
The tent poles cost big money to erect — almost $325 million for the latest Avengers movie, which was produced in England. But they’re events, which is what movies must be to get people into theaters.
Analysts are expecting Disney to earn $1.69 per share for the quarter when it next reports May 8, on revenue of $14.23 billion. But listen carefully to the conference call. Until you hear a clear solution to its media network problems, in the form of streaming revenues, Disney stock will remain weak.
When it cracks that case, however, look out above.
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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
