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Disney (DIS) Down 1.8% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for The Walt Disney Company (DIS - Free Report) . Shares have lost about 1.8% in that time frame.

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

Recent Earnings

Disney delivered second-quarter fiscal 2018 adjusted earnings of $1.84 that beat the Zacks Consensus Estimate by 16 cents and surged 23% from the year-ago quarter.

Revenues increased 9.1% from the year-ago quarter to $14.55 billion that comfortably surpassed the consensus mark of $14.23 billion.

Services (86.1% of revenues) increased 9% year over year to $12.52 billion. Products (13.9% of revenues) jumped 9.7% from the year-ago quarter to $2.03 billion.

ESPN Hurt by Higher Programming Costs

Media Networks (42.2% of revenues) revenues inched up 3.2% year over year to $6.14 billion. Cable Networks climbed 4.7% to $4.25 billion while broadcasting revenues remained almost flat at $1.89 billion.

Media Networks’ affiliate revenues increased 5% due to growth at both cable and broadcasting. Higher rates (up 7 points) were partially offset by decline in subscriber count (down 3 points).

Freeform revenues were negatively impacted by lower advertising revenues reflecting a decrease in average viewership.

ESPN benefited from an increase in affiliate as well as advertising revenues. Affiliate revenue growth reflected improvement in contractual rate, partially offset by a declining subscriber count.

ESPN advertising revenues increased 3% due to higher rates, which benefited from the shift of the College Football Playoff (“CFP”) bowl games (positive impact of 5 percentage points). However, lower impressions due to fewer units delivered and a decrease in average viewership hurt advertising revenue growth.

Broadcasting revenues benefited from higher affiliate revenues (gained from an increase in contractual rates), which was offset by lower advertising revenue growth.

Advertising revenues were hurt by fewer network impressions, which were primarily attributed to decrease in average viewership. Higher network rates benefited revenue growth partially.

Media Networks’ operating income declined 6.3% year over year to $2.08 billion. Cable Networks operating income decreased 4% to $1.73 billion while broadcasting operating income remained almost flat at $343 million.
 
Cable Networks operating income was hurt by BAMTech loss and decreases at Freeform and ESPN.

BAMTech loss reflects ongoing investments in their technology platform including costs associated with ESPN+, which Disney launched recently. The company announced the acquisition of UFC events rights starting in 2019 for five years.

The shift in CFP bowl games timing significantly increased programming costs that hurt ESPN’s profitability. Management stated that semi-final games (two in the reported quarter) generally have higher programming costs than host games (one in the reported quarter).

Equity in the income of investees decreased from $88 million in the year-ago quarter to $13 million due to higher losses from Hulu, primarily attributable to continued investments in programming and marketing.

Easter holiday Drives Parks & Resorts

Parks & Resorts (33.5% of revenues) increased 13.5% year over year to $4.88 billion.

As anticipated, the segment revenues benefited from shift in the timing of the Easter holiday. The reported quarter included one week of the Easter holiday as compared with the year-ago quarter that had none.

Parks & Resorts operating income surged 27.2% to $954 million. The shift in Easter timing added $47 million to operating income, which was partially offset by the adverse impact of the 14-day dry-dock of the Disney Magic, which negatively impacted Disney Cruise Line's operating income by about $20 million.

Higher guest attendance at Walt Disney World Resort and higher sponsorship revenues drove results. Guest spending increased due to higher average ticket prices, merchandise and beverage spending and a surge in room rates.

Per capita spending and per room spending at domestic hotels increased 6% and 12%, respectively. Occupancy 2 percentage points to 90%. Attendance at Disney’s domestic parks increased 5% and reflects a 2 percentage point benefit from the timing of the Easter holiday.

Meanwhile, international parks and resorts results benefited from growth at Disneyland Paris, and higher occupied room nights and attendance at Hong Kong Disneyland Resort.

Disneyland Paris benefited from its 25th anniversary celebration that drove higher guest spending, attendance, and hotel occupancy.

However, lower attendance, cost inflation and an unfavorable foreign currency impact hurt Shanghai Disney Resort results. Disney recently launched Toy Story Land at Shanghai Disneyland.

Black Panther Surpassed Expectations

Studio Entertainment segment (16.9% of revenues) revenues increased 21% to $2.45 billion. Segment operating income surged 29.1% to $847 million.

The impressive results were driven by robust performance from Marvel title Black Panther, which has garnered almost $1.3 billion in box-office to-date. However, another title A Wrinkle in Time disappointed.

Operating income growth was driven by strong growth in theatrical, home entertainment and TV/SVOD distribution, partially offset by higher film cost impairments.

Home entertainment benefited from higher average net effective pricing and an increase in unit sales driven by strong demand for Star Wars: The Last Jedi. Other significant titles included Thor: Ragnarok and Coco in the reported quarter.

TV/SVOD distribution results benefited from higher international growth and the domestic free television sale of Star Wars: The Force Awakens in the reported quarter.

Finally, Consumer Products & Interactive Media (7.4% of revenues) revenues increased 1.9% year over year to $1.08 billion. Segment operating income dipped 3.5% to $354 million due to lower comparable retail store sales and an unfavorable foreign currency impact.

Free Cash Flow Grew

Disney generated free cash flow of $3.46 billion in the reported quarter compared with $1.26 billion in the previous quarter.

The media behemoth repurchased 12.2 million shares for $1.3 billion during the quarter.

Outlook

Disney now expects BAMTech to hurt Media Networks’ fiscal 2018 operating income by $180 million year over year, $50 million higher than previous estimate, primarily due to increased investment in ESPN+. Management expects $100 million negative impact in the third quarter.

The company also stated that ESPN's cash ad sales are currently pacing down 1% year over year in the current quarter.

Moreover, at Parks & Resorts segment domestic resort reservations are declining 4% year over year, reflecting reduced room inventory due to conversions and ongoing room refurbishments.  Additionally, booked rates are pacing up 8%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower.

VGM Scores

At this time, DIS has a nice Growth Score of B, a grade with the same score on the momentum front. The stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, DIS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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