A month has gone by since the last earnings report for Walt Disney (DIS - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Disney due for a breakout? 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 catalysts.
Disney reported third-quarter fiscal 2018 adjusted earnings of $1.87 that missed the Zacks Consensus Estimate by a dime but increased 18.4% from the year-ago quarter.
Revenues increased 7% from the year-ago quarter to $15.23 billion. However, the figure lagged the consensus mark of $15.49 billion.
Services (86.3% of revenues) increased 8.6% year over year to $13.14 billion. However, products (13.7% of revenues) declined 2.6% from the year-ago quarter to $2.09 billion.
ESPN Grew on Higher Affiliate Revenues
Media Networks’ (40.4% of revenues) revenues climbed 4.9% year over year to $6.16 billion. Revenues from Cable Networks inched up 2.5% to $4.19 billion. Broadcasting revenues increased 10.6% year over year to $1.97 billion.
Media Networks’ affiliate revenues increased 5%, driven by higher rates (7 points), partially offset by a decrease in subscribers (2 point). Advertising revenues at the ABC Network was up 3% as higher rates more than offset lower impressions.
Media Networks’ operating income declined 1.1% year over year to $1.82 billion. Cable Networks’ operating income decreased 5.4% to $1.38 billion, while broadcasting operating income jumped 42.7% to $361 million.
Cable Networks’ operating income was hurt by BAMTech loss and decline at Freeform partially offset an increase at ESPN.
BAMTech loss reflects ongoing investments in their technology platform including costs associated with ESPN+ (launched in April 2018) along with higher content and marketing costs.
Freeform declined due to lower advertising revenues and higher marketing costs. Advertising revenues were hurt by lower impressions from a decline in average viewership.
ESPN’s results benefited from strong affiliate revenues, partially offset by higher programing costs and a decline in advertising revenues (3% of revenues).
Growth in affiliate revenues reflected contractual rate increases, partially offset by a decline in subscribers. However, higher programing costs reflected contractual rate increase for NBA programing.
Moreover, lower advertising revenues were due to a decrease in impressions from lower average viewership, partially offset by higher rates. Advertising revenues were adversely impacted by one less NBA final game.
The increase in broadcasting operating income was due to higher program sales, affiliate revenue growth and increased network advertising revenues, partially offset by an increase in programing costs.
The increase in program sales was driven by higher sales of Designated Survivor, How to Get Away with Murder and Grey’s Anatomy, partially offset by lower sales of Quantico.
Affiliate revenue growth was due to contractual rate increases. Moreover, the increase in network advertising revenues was due to higher rates, partially offset by lower average viewership.
Equity in the income of investees decreased from $127 million in the year-ago quarter to $78 million due to higher losses incurred from Hulu and lower income from A+E Television Networks (A+E).
Hulu’s losses were primarily attributed to continued investments in programing and higher labor costs. A+ E revenues were hurt by lower advertising revenues and higher programing costs.
Parks & Resorts Gained from Higher Guest Spending
Parks & Resorts (34.1% of revenues) increased 6.1% year over year to $5.19 billion. Operating income increased 14.6% to $1.34 billion.
Per capita spending at Disney’s domestic parks was up 5% on higher admissions, food, beverage, and merchandise spending. Per room spending at domestic hotels was up 8%.
Attendance at domestic parks was up 1% in the quarter and reflects about a 1 percentage point adverse impact from the timing of the Easter holiday. Occupancy at domestic hotels was down about 2 percentage points to 86%, reflecting reduced room inventory due to room refurbishments and conversions.
The growth in operating income was driven by higher guest spending due to increase in average ticket prices; food, beverage and merchandise spending; and average daily hotel room rates. However, higher costs due to an increase in labor-related costs negatively impacted results.
Increased operating income at Disney’s international parks and resorts was due to growth at Shanghai Disney Resort and Hong Kong Disneyland Resort.
Studio Entertainment Surpassed Expectations
Studio Entertainment segment (18.9% of revenues) revenues increased 20.3% to $2.88 billion. Segment operating income increased 10.8% to $708 million.
Operating income growth was driven by strong growth in domestic theatrical and TV/SVOD distribution, partially offset by higher film cost impairments and lower domestic home entertainment results.
Robust performance from Avengers: Infinity War and Incredibles 2 drove top-line growth. Disney stated that Avengers: Infinity War has grossed over $2 billion globally, making it Marvel's highest grossing film of all time. On the other hand, Incredibles 2 is the top domestic grossing animated film ever and has generated over $1 billion in global box office till date.
TV/SVOD distribution results benefited from higher international growth and increased domestic pay television rates.
However, home entertainment suffered from a decrease in unit sales, driven by the timing of the release of Star Wars titles.
Finally, Consumer Products & Interactive Media (6.6% of revenues) revenues decreased 7.7% year over year to $1 billion. Segment operating income dipped 10.5% to $324 million due to lower comparable retail store sales and reduced income from licensing activities.
Free Cash Flow Declines
Disney generated free cash flow of $2.46 billion in the reported quarter compared with $3.46 billion in the previous quarter.
The media behemoth repurchased 9.6 million shares for $970 million during the quarter.
Disney stated that ESPN's cash ad sales are currently pacing down 3% year over year in the current quarter.
Moreover, at the Parks & Resorts segment, domestic resort reservations are declining 2% year over year. Additionally, booked rates are pacing up 7%.
Further, the company announced that it will not repurchase any shares as the acquisition of 21st Century Fox assets is pending. Moreover, the acquisition is likely to increase leverage.
Management noted that Fox Networks Group International's 350 channels reach consumers in 170 countries. Moreover, Star reaches 720 million viewers a month across India and more than 100 other markets.
Further, Disney stated that the addition of Fox’s assets like Searchlight, FX, National Geographic and 20th Century Fox Film will strengthen its direct-to-consumer product offerings and improve competitive position against the likes of Netflix and Amazon.
Additionally, the company stated that it is on track to launch its streaming service in late 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Disney has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
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 #4 (Sell). We expect a below average return from the stock in the next few months.