Analysts and holders of Disney (NYSE:DIS) stock are gearing up for another exciting earnings announcement, with Disney’s fiscal fourth-quarter results scheduled to be released on Nov. 7 after the close of the market. With a streaming war between Disney and Netflix (NASDAQ:NFLX) heating up – and with Disney dealing with its headline-making purchase of $70 billion worth of Fox’s (NASDAQ:FOXA) assets – I’m sure there’ll be plenty to talk about as the big day approaches.
Even with Disney’s status as a “safety stock” that’s been in some people’s portfolios for decades, DIS stock holders are starting to get a bit skittish. That’s because, evidently, JPMorgan analyst Alexia Quadrani doesn’t much care for Disney stock right now and lowered her estimates for DIS.
The analyst even warned investors that she might cut her estimates further in the future. This leads us to the question, then, of whether JPMorgan’s pessimism is justified – and whether risk-averse investors should dump their DIS stock.
A Potential Threat to DIS Stock
It’s amazing that Netflix, a much younger company, could have such a powerful impact on Disney. While Disney is jumping on the content-streaming bandwagon with Disney+, Netflix spearheaded the streaming trend years ago. As the University of Nevada’s Benjamin Burroughs eloquently explained, the Netflix effect has been utterly transformative to the modern market for home-based entertainment:
“Cable and telecommunication companies… are dealing with the loss of subscribers and anxieties about ‘cord-cutters’ and ‘cord-nevers’ amplified by the growth, popularity, and cultural salience of streaming services such as Netflix.”
Undoubtedly Disney’s Netflix problem was top-of-mind for the owners of DIS stock as they watched the Disney stock price fall after its most recent earnings report, which was issued in early August. Indeed, a 4% share-price slide immediately ensued amid concerns that the Fox deal was too costly and wouldn’t allay concerns about Netflix completely dominating the home-entertainment market.
Evidently, Disney’s theme parks aren’t enough to keep Disney stock owners satisfied; they want the company to step up its streaming game, too, and they’re hoping for better results in November. In August, analysts, on average, were expecting adjusted earnings per share of $1.72, while the actual figure was $1.35 – a disappointment, to say the least.
An Analyst Cuts Deep
Still, for JPMorgan to slash its forecast so drastically seems like an overreaction, but I’ll let you be the judge of that: Quadrani reduced her estimate for Disney’s Q4 earnings from $1.05 per share to 95 cents, and she similarly cut her projection for the company’s FY20 EPS from $6.30 to $5.50.
Those are nasty cuts, and the explanation provided by JPMorgan should sound familiar by now:
“The investment spending in Disney’s direct to consumer platforms and the choppy integration of Fox’s assets lead to more uncertainty in the financial outlook near term.”
Okay, we get it; working through the kinks of the acquisition of Fox’s assets is going to take time and money. As mentioned earlier, JPMorgan also essentially told investors to expect more estimate cuts in the near future:
“Estimate revisions will likely be frequent and sometimes notable over the next few quarters given so many moving pieces both internally and externally as this integration and media consumption evolution proceeds.”
I suppose that “revisions” could also mean that the firm will raise its estimates, but I wouldn’t hold my breath and wait for that to happen anytime soon. As far as I’m concerned, lowered expectations are setting Disney stock up for a relief rally when it reports its earnings. And with JPMorgan admitting that Disney+ will likely have 75 million subscribers globally by the end of FY20, another post-earnings dip in the DIS stock price would only be a buying opportunity.
The Takeaway on Disney Stock
I actually find it amusing when big-bank analysts take swipes at a globally recognized, cash-rich company like Disney. Let them slash their estimates for DIS all day long if they wish; I’ll take my chances with the theme-park king, which could someday become the streaming king.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.