A month has gone by since the last earnings report for Walt Disney (DIS - Free Report) . Shares have added about 2.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Higher attendance, Increased DTCI Segment Revenues Aided Disney
Disney reported earnings of $1.61 per share, after removing certain items that affect comparability, in second-quarter fiscal 2019. The figure beat the Zacks Consensus Estimate by 2 cents but declined 13% year over year.
Revenues of $14.92 billion increased 3% from the year-ago quarter. The figure also surpassed the consensus mark of $14.64 billion.
Notably, Twenty-First Century Fox’s revenues of $373 million and operating income of $25 million were included in the reported quarter’s results following its acquisition by Disney on Mar 20, 2019.
Strong performance of Direct-to-Consumer & International (DTCI) and Parks, Experiences & Consumer Products segments primarily led to top-line growth.
Media Networks Up on Higher Cable Revenues
Media Networks’ (37% of revenues) revenues of $5.53 billion increased 0.3% year over year. However, operating income declined 3% year over year to $2.19 billion.
Media Networks’ affiliate revenues increased 4%, driven by higher rates (7 points), partially offset by a decrease in subscribers (2 points).
Cable Networks revenues increased 2% to $3.71 billion and operating income increased 2% to $1.76 billion.
The increase in operating income was due to higher affiliate revenues at ESPN, offset by decline in advertising revenues and increase in production and programming costs. Higher contractual rate and production costs, offset by benefit from a mix shift in College Football Playoff (CFP) games, resulted in increase in production and programming costs. Moreover, ad revenues declined due to lower rates, partially offset by higher impressions.
Revenues from Broadcasting decreased 2% year over year to $1.82 billion and operating income fell 29% year over year to $247 million. Increase in programming costs, decline in ad revenues and lower program sales affected operating income. This was partially offset by higher affiliate revenues from contractual rate increases.
Notably, ad revenues declined due to lower average network viewership, partially offset by higher network rates. Higher average cost of network programming and production cost write-downs led to increase in programming costs in the reported quarter.
Program sales were lower due to decline in sales from Criminal Minds and Grey’s Anatomy, offset by higher sales from How to Get Away with Murder.
Equity in the income of investees was a loss of $312 million against income of $6 million in the year-ago period due to “impairment of investment in Vice”, partially offset by consolidating Hulu’s results.
Parks & Resorts Gains From Higher Guest Spending
Parks, Experiences & Consumer Products segment (41.3% of revenues) revenues increased 4.5% year over year to $6.17 billion. Operating income increased 15% to $1.51 billion.
However, operating income was negatively impacted by $45 million due to the timing of the Easter holiday period.
Growth in operating income was due to “higher attendance and occupied room nights at Hong Kong Disneyland Resort, growth in domestic theme parks and resorts and increase in consumer products business and cruise line.”
Higher guest spending due to increase in average ticket prices, food, beverage and merchandise spending, increase in occupied room nights at Walt Disney World Resort and attendance levels led to growth in domestic theme parks and resorts. However, this was partially offset by increased costs.
Growth in games business aided consumer products business. This was partially offset by decrease in merchandise licensing business. Higher average ticket prices and the “impact of a 14-day Dry Dock of the Disney Magic” aided cruise line’s operating income.
Shanghai Disney Resort results were in line with the year-ago quarter’s results due to higher average ticket prices. This was primarily offset by lower attendance.
Studio Entertainment Disappoints
Studio Entertainment segment (14.3% of revenues) revenues decreased 14.6% to $2.13 billion. Segment operating income decreased 39% to $534 million owing to a decline in theatrical and home entertainment distribution results. This was offset by higher TV/SVOD distribution results.
Decline in theatrical distribution results was due to lack of contribution from Black Panther and Star Wars: The Last Jedi in the reported quarter. This was offset by the strong performance of Captain Marvel.
Home entertainment results were lower due to lack of Marvel or Star Wars titles in the reported quarter. However, TV/SVOD distribution results benefited from higher “domestic pay television title availabilities and rates” and adoption of new accounting standard. This was partially offset by lower free television sales.
Disney’s most awaited movie, Avengers: Endgame released in the current quarter recorded phenomenal success. The movie became the second-highest grossing film of all time and has collected about $2.3 billion to date globally.
DTCI Incurs Heavy Investments
Direct-to-Consumer & International segment (6.4% of revenues) revenues increased 14.9% to $955 million. However, segment operating loss increased from $188 million in the year-ago period to $393 million.
Increase in operating loss was due to higher investments in ESPN+, higher costs associated with the upcoming launch of Disney+, consolidation loss of Hulu and loss from streaming technology services, partially offset by an increase at International Channels.
International Channels benefited from growth in affiliate rates and lower sports programming costs.
Moreover, to support its direct-to-consumer (DTC) business, Disney is looking to boost FX network’s production capacity. Further, the company is working with National Geographic to bring its content to its DTC platforms.
Notably, following Disney’s acquisition of the majority stake in Hulu, its operating income for a period of 11 days, has been included in the segment’s results. Additionally, Hulu’s top line, for the same period, has been consolidated with Disney’s top line in the reported quarter. Earlier Hulu’s results were reported under equity in the income/loss of investees.
Free Cash Flow Declines
Disney generated free cash flow of $2.72 billion in the reported quarter compared with $3.46 billion in the year-ago period.
Moreover, capital expenditures increased to $2.39 billion from $2.04 billion in the year-ago quarter over a six-month period. The increase was due to higher spending on new attractions at Disney’s domestic theme parks and resorts.
Upcoming Movie Slate
Following Fox’s acquisition, Disney’s slate of movies releases have increased. The movies scheduled to release till Christmas include “Aladdin, The Lion King, and Maleficent: Mistress of Evil, from Disney; Pixar's Toy Story 4; Frozen 2 from Disney Animation; and Star Wars: The Rise of Skywalker as well as Dark Phoenix, Stuber, The Art of Racing in the Rain, Ready or Not, Ad Astra, Woman in the Window, Ford V. Ferrari, and Spies in Disguise from the Fox Studios.”
Guidance for Q3
Direct-to-Consumer business segment operating income is expected to have a negative impact of $460 million due to continued investments in ESPN+ and Disney+.
Earnings per share are expected to bear a negative impact of 35 cents due to Fox acquisition. Additionally, GAAP EPS is expected to be negatively impacted by 37 cents due to $900 million charges related to purchase accounting.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
At this time, Disney has an average Growth Score of C, 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 D. 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. Notably, Disney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.