In retrospect, last quarter could have been worse for entertainment giant Walt Disney (NYSE:DIS). On the flipside, last quarter arguably should have been better. DIS stock snapped back a little from the initial 2% pullback following Tuesday’s post-close release of its fiscal third-quarter numbers. But, it was still in the red early Wednesday as investors further digested the results and handicapped its future.
Of course, that future is a moving target that’s proving tough to handicap. After winning a bidding war with Comcast (NASDAQ:CMCSA) for the majority of Twenty-First Century Fox (NASDAQ:FOXA), there’s no denying the company has a robust library that will help it abate the cord-cutting movement. After all, DIS secured Fox assets like the Avatar and X-Men movie franchises as well as hit TV programs like The Simpsons.
Nevertheless, it remains unclear if CEO Robert Iger can orchestrate enough magic from the soon-to-be-combined companies to justify the recent rally from DIS stock.
Disney Earnings Recap
For the quarter ending in June, Walt Disney turned $15.23 billion worth of revenue into a per-share profit of $1.87-per-share. Both were up from year-ago levels, when Disney earned $1.58-per-share of DIS stock on sales of $14.24 billion.
But, analysts were collectively expecting a top line of $15.35 billion and a bottom line of $1.95-per-share. Overall net income grew from $2.37 billion to $2.92 billion, despite the steep costs associated with developing a new streaming service, and despite the growing programming costs for its struggling ESPN division.
The company’s parks and resorts arm drove the bulk of the income improvement.
Iger commented on the third-quarter numbers, saying:
“We’re pleased with our results in the quarter, including a double-digit increase in earnings per share, and excited about the opportunities ahead for continued growth … Having earned the overwhelming support of shareholders, we are more enthusiastic about the 21st Century Fox acquisition than ever, and confident in our ability to fully leverage these assets along with our own incredible brands, franchises and businesses to drive significant value across the entire company.”
Indeed, the bulk of the Q3 conference call was about how Disney’s future would look radically different with Fox under the same umbrella.
Drilling Things Down for DIS Stock
The 7% growth that sparked a 23% improvement in net income wasn’t evenly distributed.
The company’s Media Networks arm, which included ESPN and The Disney Channel as well as ABC (among others) saw top-line growth of 5%, but still saw operating income slide slightly. Parks and resorts drive revenue growth of 6%, pumping up its bottom line by 15%. Disney’s Studio Entertainment division — its smaller arm, by sales and profits — beefed up its revenue by 20%, leading to 11% growth in its bottom line.
Disney Media Networks results include the impact of sports streaming platform ESPN+, which launched in April. Although the company didn’t offer specifics, Iger was willing to say of the service during the earnings call, “It’s still early days, but conversion rates from free trials to paid subscriptions are strong and subscription growth is exceeding our expectations.”
The quarterly statement from the company also noted stronger guest spending and higher ticket prices as a key to the revenue and income growth there, further boosted by strong showings from its Shanghai Disney Resort and Hong Kong Disneyland Resort.
Meanwhile, Walt Disney’s Consumer Products and Interaction Media arm, which only makes up roughly 6.5% of the company’s total business, saw sales fall 8% and operating income slump 10% year-over-year.
A Look Ahead for Disney Stock
As of the most recent look, analysts were calling for sales of $13.85 billion for the quarter underway, setting the stage for a per-share profit of $1.40. Both would be markedly up from year-ago levels. For the full year, the pros are calling for earnings of $7.07-per-share of DIS stock on revenue of $59 billion, also well up from last year’s totals.
Next year’s forecasts aren’t quite as impressive. Analysts are only looking for income of $7.54-per-share, up 6.6%, on a 2.5% improvement in revenue that would put the top line somewhere near $60.5 billion.
However, those outlooks don’t necessarily reflect Walt Disney’s current growth pace, and they can’t accurately reflect what sort of impact the addition of Fox’s assets will make.
Whatever that impact is going to be though, Iger and Disney have high hopes for it, and for the planned streaming platform expected to launch in 2019 that will aggregate Disney’s and Fox’s best content.
Iger knows the service won’t look like that of streaming giant Netflix (NASDAQ:NFLX) — at least not initially — in terms of sheer quantity of programs and movies, explaining “We don’t want to go to market with an aggregation play.” Iger added, “It takes time to build the kind of content library that we intend to build.”
Still, given Netflix’s annual revenue run rate of roughly $14 billion, even a decent-sized fraction of that figure could prove to be a nice boost for DIS stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
