A month has gone by since the last earnings report for Walt Disney (DIS - Free Report) . Shares have lost about 3.5% in that time frame, outperforming 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 drivers.
Disney's Q4 Drove on Studio Entertainment and Parks & Resorts Results
Disney reported fourth-quarter fiscal 2018 adjusted earnings of $1.48 per share that comfortably beat the Zacks Consensus Estimate of $1.31 per share. The figure increased 38% from the year-ago quarter.
Revenues increased 12% from the year-ago quarter to $14.31 billion. The figure also surpassed the consensus mark of $13.81 billion. Strong performance of Studio Entertainment and Parks and Resorts primarily led to top- and bottom-line growth.
Media Networks Up on Higher Affiliate Revenues
Media Networks’ (41.7% of revenues) revenues climbed 9.1% year over year to $5.96 billion. Revenues from Cable Networks increased 5% to $4.13 billion. Broadcasting revenues increased 21% year over year to $1.83 billion.
Media Networks’ affiliate revenues increased 5%, driven by higher rates (7 points), partially offset by a decrease in subscribers (1 point) and foreign currency fluctuations (1 point).
Media Networks’ operating income increased 4% year over year to $1.53 billion. Cable Networks’ operating income decreased 6% to $1.2 billion, while broadcasting operating income surged 66% to $379 million.
Cable Networks’ operating income was hurt by BAMTech loss, partially offset by increases at Freeform and Disney channels.
BAMTech loss reflects ongoing investments in technology along with higher content and marketing costs.
Lower programming costs, increased affiliate revenues and lower marketing costs led to increase in Freeform operating income. This was partially offset by lower advertising revenues due to decrease in average viewership and fewer units delivered.
Higher operating income at Disney channels was due to increase in income from program sales, lower programming costs and reduced marketing costs.
ESPN’s results were flat year over year as strong affiliate revenues were partially offset by higher programing and production costs and a decline in advertising revenues (6%).
ESPN+ launched in early April recently surpassed one million paying subscribers primarily due to a strong content lineup and targeted demographic advantage.
Growth in affiliate revenues reflected contractual rate increases, partially offset by a decline in subscribers. Moreover, lower advertising revenues were due to a decrease in impressions from lower average viewership.
The increase in broadcasting operating income was due to higher program sales and affiliate revenue growth. The increase in program sales was driven by higher sales of two Marvel series and Black-ish in the reported quarter as against sale of one Marvel series in the prior-year quarter.
Affiliate revenue growth was due to contractual rate increases. However, network advertising revenues remained flat year over year due to lower average viewership, partially offset by higher rates and increased political advertising spend.
Equity in the income of investees decreased $20 million from the year-ago quarter to a loss of $10 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 continuous investments in programing, increased marketing spend and higher labor costs, partially offset by increase in advertising and subscription revenues. A+E revenues were hurt by lower advertising revenues and higher programing costs, partially offset by higher program sales.
Parks & Resorts Gains From Higher Guest Spending
Parks & Resorts (35.4% of revenues) increased 8.6% year over year to $5.1 billion. Operating income increased 11% to $829 million.
Per capita spending at Disney’s domestic parks was up 9% on higher admissions, food, beverage, and merchandise spending. Per room spending at domestic hotels was up 8%.
Attendance at domestic parks was up 4% in the quarter and occupancy at domestic hotels was up about 1 percentage point to 85.
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 primarily at the domestic operations. However, higher costs due to an increase in labor-related costs negatively impacted results.
Operating income at Disney’s international parks and resorts was flat year over year. Increase in average ticket prices at Disneyland Paris, and attendance growth and higher occupied room nights at Hong Kong Disneyland Resort were partially offset by low ticket prices at Shanghai Disney Resort due to softness experienced in tourism and consumer confidence in China.
Studio Entertainment Surpasses Expectations
Studio Entertainment segment (15% of revenues) revenues surged 50.2% to $2.2 billion. Segment operating income surged 173.4% to $596 million.
Operating income growth was driven by strong growth in theatrical, TV/SVOD and home entertainment distribution and lower film cost impairments.
Robust performance of Incredibles 2 and Ant-Man and the Wasp drove top-line growth. TV/SVOD distribution results benefited from higher international free and pay television businesses growth.
Titles like Avengers: Infinity War and Solo: A Star Wars Story in fourth-quarter fiscal 2018 led to higher unit sales and pricing. This led to increase in operating income of home entertainment.
Finally, Consumer Products & Interactive Media (7.8% of revenues) revenues decreased 7.6% year over year to $1.1 billion. Segment operating income dipped 10% to $337 million due to reduced income from licensing activities, partially offset by lower general and administrative expenses.
Free Cash Flow Declines
Disney generated free cash flow of $2.65 billion in the reported quarter compared with $2.68 billion in the previous quarter.
The media behemoth repurchased 3.58 billion shares in fiscal 2018.
Disney's offer to buy some of Twenty-First Century Fox’s entertainment assets earned approval from the European Commission, under the condition that Disney divests its interests in channels such as History and Lifetime in the European Economic Area. The EU, the U.S. Justice Department, and both companies’ shareholders have now approved the deal.
Management noted that the upcoming streaming service is officially named Disney+ and is expected to be available in the U.S. market by late next year. Notably, the investor conference that will be held in April will provide detailed insights on Disney+ and its content lineup.
We believe the strong content lineup and Fox’s deal will help Disney compete with the likes of Netflix, Amazon and the upcoming streaming services of Apple and AT&T.
First-quarter fiscal 2019 theatrical business operating income is expected to be $600 million, lower than the year-ago quarter’s figure. This is primarily due to higher contribution from Star Wars: The Last Jedi, Thor: Ragnarok and Coco in first-quarter fiscal 2018. Operating income will have a negative impact of $100 million due to continue investments in ESPN+.
Cable programming expenses for first-quarter fiscal 2019 are expected to be up by 9%. For fiscal 2019, cable programming expenses are anticipated to be in mid-single digits due to contractual rate increases.
Movies expected to release in 2019 include Mary Poppins Returns, Ralph Breaks the Internet, Captain Marvel, Dumbo, Aladdin, The Lion King, Toy Story 4 and the next Avengers film.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.64% due to these changes.
Currently, Disney has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. 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 this revision indicates a downward shift. Notably, Disney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.