Walt Disney Stock Down On ESPN Worries After Q1 Earnings Beat

  • Walt Disney has reported healthy Q1 2016 earnings driven by a stellar performance by Star Wars: The Force Awakens.
  • The company's Media Networks, however, disappointed by posting a drop in earnings mainly due to a shift in timing of the college bowl games to the first quarter as well as higher programming costs.
  • All other operating segments by the company recorded healthy revenue and income growth.
  • What is the outlook for Walt Disney stock?

Giant media company Walt Disney (NYSE:DIS) has reported healthy Q1 2016 earnings that beat analyst estimates, powered by a blockbuster performance by Star Wars: The Force Awakens. The House of Mouse reported first quarter revenue of $15.24B, good for 13.8%Y/Y growth and $490M better than Wall Street consensus estimate. Non GAAP EPS of $1.63 represented 28% Y/Y growth and exceeded analyst estimate by $0.18. On a GAAP basis, Walt Disney reported diluted EPS of $1.73, a 36% Y/Y increase.

Walt Disney’s segment performance was as follows:

  • Media Networks--revenue was up 8% Y/Y to $6,332M while operating income was down 6% to $1,412M. Both Cable Networks and Broadcasting divisions recorded a drop in operating income to the tune of 5% to $1,189M for Cable Networks and 7% to $233M for Broadcasting. The company attributed the growth in revenue to higher advertising fees while at the same time saying that lower operating income for Cable Networks was orchestrated by higher programming costs and the shift in timing for College Football Playoff (CFP) bowl games from the second quarter to the first quarter.

Walt Disney had talked about this during its fourth quarter earnings call when the company said that programming costs were likely to grow in the high teens during the first quarter but the decline in the low teens during the second quarter due to the shift in timing of the bowl games. I had discussed this in my Walt Disney Q1 earnings preview where I pointed out that this remained the biggest risk for Disney stock post earnings because the investing world was likely to ignore a good overall performance by the company and instead focus on the performance of Media Networks--and it did. Disney stock first made some gains in aftermarket trading due to the strong overall earnings growth before moving into red territory due to concerns about the decline in earnings by Media Networks.

  • Studio Entertainment--as was widely expected, Walt Disney’s Studio Entertainment performed exemplarily well driven by 5-star performance by Star Wars: The Force Awakens, which recently crossed the $2B in global gross revenue and became the third-highest grossing movie of all time. Revenue for the segment was up 46% to $2,721M with operating income jumping 86% to $1,014M. Disney has lined up a sequel trilogy for Star Wars. The company has a pretty good track record of creating successes out of well-known themes and investors can therefore, expect that the upcoming Star Wars sequels will be just as successful as The Force.
  • Consumer Products and Entertainment--the segment reported revenue of $1,910M, good for 8% growth with an operating income of $860M, up 23% Y/Y. The performance by this segment was modest considering that investors expected Star Wars merchandise to bolster merchandising partner sales and royalties for Walt Disney. Additionally, Disney recently ratcheted up royalty rates for Star Wars merchandise to 20% from 10%. It’s therefore quite likely that the segment will perform better in the coming quarters considering that Walt Disney merchandising partners such as leading toymaker Hasbro (NASDAQ:HAS) reported record revenue during its latest quarter propelled by robust Star Wars merchandise sales.
  • Parks and Resorts--the segment reported revenue of $4,281, up 8% Y/Y with operating income of $981M, good for 22% growth. Investors can expect the segment to perform better in the coming quarters as the Star Wars effect trickles down, though this will be tempered by the fact that Walt Disney might not be in a position to substantially increase ticket prices after a long runup of ticket price increases stretching back to five years.

Walt Disney stock was down 3.5% in aftermarket trading after the report, which is quite modest considering the amount of pessimism that hangs around the company due to ESPN and cord-cutting worries. But ass I pointed out in my earnings preview, this was to be expected because all eyes were on ESPN and not Star Wars. Long-term investors should take note that there is likely to be a reversal of trends during the second quarter since the company projects programming costs to fall in the high teens. Overall the latest report by Walt Disney was healthy and there were no nasty surprises as the bears expected. Walt Disney did not shed any light on ESPN subscriber trends, but could do so in the coming days. But judging by the fair revenue growth in the segment, it’s not likely that there was a lot of cord-cutting going on.

Walt Disney stock remains a good long-term investment.

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Comments on this article and DIS stock

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There must be some narrow minded investors on Disney stock as apparently they're not seeing the whole picture of the Disney portfolio. The bottom line is the company killed expectations with their best quarter ever. The company has a lot of growth ahead of it, with the opening of new theme parks and 6 more Star Wars movies as well as their Marvel movies. Traders and investors are narrowly focusing on only one segment of the company, which saw some improvement. This 6 percent drop only equates to roughly 300 to 400 mil, yet the company made 5 billion from a single Star Wars flick so far (when including both merchandise sales and film proceeds). Six more of these bad boys are coming. That and their Marvel franchise, makes the cable media losses pale in comparison. Disney is also adapting to future cable cutters, as ESPN can not be streamed via Sling, and they're doing things with Netflix and of course they own Hulu now as well.. In short, Disney has survived decades before ESPN and will seems to be positioned to grow for many years to come.
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