Walt Disney Co. Worth An Investment Post The Double Whammy?

  • Walt Disney posted a rare earnings miss during its latest earnings call.
  • The company missed on both top and bottom line estimates.
  • Is Walt Disney worth an investment after the double miss?.

Walt Disney (NYSE:DIS) earning misses are usually few and far between. The company's latest earnings call happened to be one of these. After nine consecutive quarters of meeting or exceeding earnings expectations, Walt Disney delivered a double whammy during Q2 FY16 earnings call after posting both top and bottom line misses. Disney reported revenue of $12.97B, good for 4.1% Y/Y growth but below the consensus on Wall Street by a huge $220M. Non-GAAP EPS of $1.36 was 11% higher than a year ago but still $0.04 below the consensus. On a GAAP basis, Disney posted EPS of $1.30, a year-over-year increase of 6%.

That marked the 11th consecutive quarter that Disney delivered double-digit growth in adjusted earnings. Meanwhile, the company's Studio Entertainment segment continued to dazzle as expected after posting a 22% and 27% growth in revenue and operating income, respectively. That impressive performance was driven by blockbusters such as The Force Awakens, which Disney said had grossed close to $2.1B in global box office while Zootopia had racked up $960M making it Disney's second-highest grossing animation film of all-time.

ESPN Disappoints, but...

But the impressive performance by the Studio segment could not save the company or Disney stock from the wrath of investors, which has tumbled 7% since. Once again all eyes were on Walt Disney's pivotal Media Networks, and specifically ESPN. Media Networks recorded a revenue decline after posting revenue of $5,793M compared to $5,810M in the previous year's comparable quarter. The decline was caused by lower cable revenue, specifically a 13% decline in ESPN ad revenue which Disney chalked up to the shift in timing of the bowl games from Q1 2016 to Q4 2015. It's also important to note that Disney had already warned investors about the adverse effects of the games during the quarter.

ESPN has for long been the bone of contention for Disney bears. ESPN has been losing subscribers in tandem with most cable TV services, and the bears have for long argued that it was just a matter of time before the segment found itself in a revenue tailspin. But it's very important to note that ESPN's latest revenue decline was not tied to subscriber loss. Disney said that adjusting for the shift in timing of the bowl games, the segment would have posted a 3% revenue growth. In fact, Disney added that ESPN revenues for the current quarter were already pacing 5% higher versus the prior year.

Disney's claims seem to be supported by ABC. ABC, Disney's smaller cable service, managed to post 5% growth in ad revenue. But perhaps one of the most encouraging trends that emerged from the Media segment results is that affiliate revenue climbed 5% after adjusting for adverse forex effects. Affiliate fees refers to the money that cable TV service providers such as Comcast -A (NSDQ:CMCSA) pay for rights to use its network channels such as ESPN and ABC. A cross-section of Wall Street analysts had been worried that Disney's affiliate fees were in danger of hitting a plateau after having been on the rise for years. ESPN commands much higher affiliate fees than its cable rivals.

DIS-1

Source: Forbes

Disney is expected to increase ESPN affiliate fees by about 10% in the current year so the outlook for ESPN this year is quite good.

Meanwhile, Disney plans to open more theme parks both at home and abroad. The company's Park and Resorts segment is its second largest revenue segment and posted a 4% and 10% growth in revenue and operating income, respectively.

Investors though will not stop worrying about ESPN any time soon despite the fact that Disney's Studio segment has continued to be a stellar performer. Luckily the near and mid-term outlook for the segment appears to be quite good. Investors should take advantage of the latest selloff in DIS stock to open new positions.

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