Walt Disney Earnings Q4 FY 15 Preview: Will Cable Worries Pull Down Disney Stock?

  • Walt Disney reports fourth quarter fiscal 2015 results on November 5 after market close.
  • The company's cable division continues to be a source of short-term worries due to cord-cutting and falling TV ratings.
  • Walt Disney will be hard-pressed to impress investors due to the general pessimism hanging over cable companies and this might limit the upside of its shares.
  • But the medium and long-tern outlook for the company remains good.

Giant media conglomerate Walt Disney (NYSE:DIS), one of the top-performing stocks in the Dow Jones Industrial Average (INDEX:INDU) this year, is expected to report Q4 FY 15 earnings on Nov.5 after market close. Disney did not provide any guidance for the fourth quarter but only provided long-term guidance for its various revenue segments. Nevertheless, the consensus amongst analysts is for the company to report EPS of $1.16 compared to $0.89 for the prior year quarter. Disney has managed to beat earnings estimates for last four quarters running and stands a good chance to extend that streak.

Disney Earnings Surprise History

Fiscal
Quarter End
Date
Reported
Earnings
Per Share
Consensus
EPS* Forecast
%
Surprise
Jun2015 08/04/2015 1.45 1.39 4.32
Mar2015 05/05/2015 1.23 1.11 10.81
Dec2014 02/03/2015 1.27 1.08 17.59
Sep2014 11/06/2014 0.89 0.88 1.14

Source: NASDAQ

But Disney might still find itself in trouble even if it manages to top estimates--if its cable division continues showing anemic growth.

Cord-cutting Worries Dogging Disney

Although Walt Disney’s YTD share return of 20% still looks impressive, it belies the 12% or so the shares shed after the company’s third quarter earnings call, the worst decline by the shares after an earnings call in recent history. The hammering came after Disney reported that rampant cord-cutting at its cable companies such as ESPN, its biggest cash cow, as well as the strong dollar, would depress future earnings.
DIS stock chart

Source: Disney Stock Price Data by amigobulls.com

Now cable networks are Walt Disney’s most important revenue and income segment, contributing about 44% of revenue and 58% of the company’s operating income. But worryingly, income growth by the segment has lately slowed down pretty dramatically. Disney’s Media Networks segment that comprises Cable Networks and Broadcasting, saw its revenue grow at a healthy 9% during the first nine months of the year, but operating income grew just 2%, the lowest by any segment. Cable Networks operating income fell 1% during the period.

The strong top line growth is being driven by growth in Disney’s newly launched subscription video on-demand, or SVOD, programs. Disney says that the falling income is being orchestrated by lower ESPN ratings and rates, which is disheartening considering that ESPN is widely regarded as the strongest channel in the country. If ESPN cannot attract premium advertising rates, then Disney’s other less popular channels such as ABC are doomed to fare much worse.

Disney then went ahead and adjusted downwards its earlier cable outlook for 2013-2016 saying that it expects the segment to record growth in the mid-single digits as opposed to the high single-digits it had forecast. The guidance did nothing to allay investor fears that Disney’s cash cow could soon find itself in a world of pain.

The bright side of the sad story is that Disney is increasingly finding ways to compensate cord-cutting in American homes. ESPN has long enjoyed exclusive rights to the country’s most popular games such as football and basketball. The top-ten most watched cable programs all belong to ESPN. But subscribers could only receive it via cable. Now, for just $20 per month, subscribers can view ESPN programming streamed via their tablets, smartphones, and laptops without paying any satellite or cable bill. Cable companies charge an average of $95.73 per month. So the new streaming charge might prove to be a sweet spot that encourages people to sign up.

Walt Disney’s SVOD programs also provide another reason to remain optimistic about the future of this important segment.

Studio Entertainment a Bright Spot

Walt Disney’s Studio Entertainment segment, the company’s third-largest comprising about 16% of revenue, remains a bright spot. During the last quarter, the segment saw its revenue jump 13% to $2,040 million while operating income grew 15% to $472 million, the strongest growth by any segment. The impressive growth is being driven by the strong performance by movies such as Marvel’s Avengers: Age of Ultron, and good reception of theatrical performances such as Cinderella. Walt Disney movies are generally enjoying a strong year with several having set box office records.

Takeaway

 There is a general pessimism hanging over the heads of cable TV companies. Time Warner (NYSE:TWX) stock tanked 9% after the company’s last earnings call even though the company reported a healthy revenue of $7.3 billion, good for 8% growth. Both the company’s revenue and profits topped expectations. It’s therefore doubtful if investors will be satisfied even if Walt Disney reports decent cable network results. The story could get much worse if the company reports bad results for the segment. Walt Disney stock therefore appear to have substantial downside in the short-term due to cable worries.

But as several analysts have previously noted, investors have unnecessarily entered into panic mode. Disney’s new streaming services have been received well and have strong potential to increasingly offset losses due to cable cutting. Overall, Walt Disney remains a top long-term pick despite its short-term headwinds.

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