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Why Is Disney (DIS) Up 2.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Walt Disney (DIS - Free Report) . Shares have added about 2.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Disney due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Disney Misses on Q3 Earnings & Revenue Estimates

Disney reported third-quarter fiscal 2019 adjusted earnings of $1.35, missing the Zacks Consensus Estimate by a whopping 41 cents. The figure also decreased 27.8% from the year-ago quarter.

On Mar 20, Disney acquired Twenty-First Century Fox (21CF) for cash and an issuance of 307 million shares. The reported-quarter results include 21CF and Hulu LLC (Hulu).

These consolidations affected earnings by 60 cents as against management’s guidance of a negative impact of 35 cents.

Revenues jumped 32.9% from the year-ago quarter to $20.25 billion. However, the figure lagged the consensus mark of $21.68 billion.

Services (89% of revenues) surged 37.1% year over year to $18.02 billion. Moreover, products (11% of revenues) increased 6.6% from the year-ago quarter to $2.22 billion.

Media Networks Segment Details

Media Networks’ (33.2% of revenues) revenues climbed 21.3% year over year to $6.71 billion. Revenues from Cable Networks increased 24.1% to $4.46 billion. Broadcasting revenues were up 16.1% year over year to $2.25 billion.

Media Networks’ segment operating income increased 7% year over year to $2.14 billion. Cable Networks’ operating income jumped 15% to $1.64 billion, while broadcasting operating income declined 17% to $307 million.
 
Cable Networks’ operating income growth was driven by the addition of 21CF businesses (primarily the FX and National Geographic networks) and an increase at ESPN, partially offset by a decrease at Freeform.

ESPN’s results benefited from strong growth in advertising and affiliate revenues, partially offset by higher programming and production costs.

Advertising revenues benefited from increases in units sold and rates, partially offset by lower viewership. In addition, advertising revenue growth gained from two additional NBA finals games.

Growth in affiliate revenues reflected contractual rate increases, partially offset by a decline in subscribers.

However, higher programming and production costs reflected contractual rate increase for MLB and NBA programming, and new rights for boxing and mixed martial arts.

Freeform witnessed decline due to rise in programming and production costs.

The decrease in broadcasting operating income resulted from lower ABC Studios program sales and network advertising revenues.

Parks, Experiences and Products

The segment revenues (32.5% of revenues) increased 7.2% year over year to $6.58 billion.

Operating income went up 3.9% to $1.72 billion, driven by the robust performance from consumer products businesses and Disneyland Paris, partially muted by weak results at domestic parks and resorts. Disney’s results benefited from a shift in the timing of the Easter holiday, which entirely fell in the reported quarter.

Consumer products benefited from growth in merchandise licensing and retail businesses.

Merchandise licensing growth was primarily driven by higher revenues from the Toy Story and Avengers merchandise, partially offset by a decrease from the Star Wars merchandise. Retail business revenues gained from higher comparable store sales and online revenues.

Operating income growth at Disneyland Paris was primarily owing to higher average ticket prices. Domestic parks and resorts operating income, however, declined due to higher costs and lower volume, partially offset by increased average per capita guest spending.

Disney stated that attendance at its domestic parks was down 3% in the June-end quarter. However, per capita spending was up a healthy 10% on higher admissions, food and beverage and merchandise spending. Per room spending at domestic hotels was up 3%, and occupancy was up 2% to 88%.

Guest spending growth was primarily driven by higher average ticket prices, and increased food, beverage and merchandise spending.

Studio Entertainment Growth Solid

Studio Entertainment segment (18.9% of revenues) revenues surged 33.2% to $3.84 billion.

Operating income increased 13% to $792 million, backed by higher theatrical distribution results and lower film cost impairments in the company’s legacy operations. Nevertheless, these were partially muted by the 21CF business losses, and dismal TV/SVOD and home entertainment distribution results in Disney’s legacy operations.    

Theatrical distribution revenues benefited from the solid performance of Avengers: Endgame, Aladdin, Captain Marvel and Toy Story 4.

The 21CF businesses operating loss resulted from a loss in theatrical distribution, primarily due to the lackluster performance of Dark Phoenix.

Direct-to-Consumer & International Interactive Media

The segment (19.1% of revenues) revenues came in at $3.85 billion, significantly up from $827 million reported in the year-ago quarter.

ESPN+ had more than 2.4 million paid subscribers at the end of the fiscal third quarter, while Hulu had approximately 28 million paid subscribers.

Operating loss widened to $553 million from $168 million reported in the year-ago quarter. Consolidation of Hulu, and ongoing investments on ESPN+ and Disney+ affected profitability.

The 21CF film studio reported an operating loss of almost $170 million as against an estimated operating income of $180 million recorded in the year-earlier quarter.

Although the 21CF businesses gained from profits in the Fox and National Geographic international channels, this was partially offset by a loss at Star India ($60 million against Disney’s estimate of operating income of $150 million in the year-ago quarter).

Star’s profitability suffered due to higher costs related to the rights of the quadrennial Cricket World Cup and the Indian Premier League.

Other Quarter Details

Selling, general and administrative (SG&A) expense surged 51.9% to $3.36 billion in the reported quarter.

Segment operating income declined 5.4% year over year to $3.96 billion. Consolidation of Hulu and intersegment eliminations marred profit by almost $300 million.

Free cash outflow at the end of the quarter was $2.93 billion compared with free cash flow of $2.46 billion reported in the year-ago quarter.

Outlook

For fourth-quarter fiscal 2019, Disney expects the Parks, Experiences and Products segment operating income to benefit from the full quarter of Star Wars: Galaxy’s Edge at Disneyland and growth in merchandise licensing.

Disney stated that so far this quarter, domestic resort reservations are pacing up 4% year over year, while book rates have been up 3%.

Management expects the Direct-to-consumer & International segment to report roughly $900 million in operating losses, which represents an increase of almost $560 million year over year. This is primarily due to continued investment in DTC services, including ESPN+ and Disney+, and the consolidation of Hulu.

Media Networks’ operating income is expected to decline 10% year over year. The 21CF’s television businesses are anticipated to contribute roughly $200 million in operating income, with two-third coming from broadcasting and the rest from cable.

However, Disney estimates the 21CF’s television businesses to generate operating income of approximately $485 million in the fiscal fourth quarter. The estimated year-over-year decline is due to lower program sales and higher content development expense.

Moreover, difficult comparisons at ABC Studios and higher programming expenses at ESPN, resulting from contractual rate hikes and launch costs for the ACC Network and lower ad revenues, might hurt the ongoing quarter’s results.

Disney projects the acquisition of 21CF and the impact of taking full operational control of Hulu to hurt the fiscal fourth-quarter earnings, before purchase accounting, by 42 cents.

Nevertheless, management expects the acquisition to be accretive to earnings before purchase accounting for fiscal 2021. Disney also remains on track to realize more than $2 billion in cost synergies by fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -20.37% due to these changes.

VGM Scores

Currently, Disney has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Disney has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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