Disney (DIS) Up 11.1% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Walt Disney (DIS). Shares have added about 11.1% 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 drivers.

Disney Q4 Earnings Beat Estimates, Revenues Up Y/Y

Disney reported fourth-quarter fiscal 2019 adjusted earnings of $1.07 per share, beating the Zacks Consensus Estimate by 12.6% but decreasing 27.7% year over year.

Notably, on Mar 20, Disney acquired Twenty-First Century Fox (21CF) for cash and issuance of 307 million shares. The quarterly results include 21CF and Hulu LLC (Hulu) results and the consolidations affected earnings before purchase accounting by 47 cents.

Revenues jumped 33.5% from the year-ago quarter to $19.10 billion, which surpassed the consensus mark by 0.4%. The year-over-year growth was driven by solid top-line performance across all segments, particularly the Studio Entertainment and Direct-to-Consumer (DTC) businesses.

However, higher operating losses in the DTC segment and Media Networks’ operating income decline hurt profitability.

Media Networks Segment Details

Media Networks’ (34.1% of revenues) revenues grew 22.3% year over year to $6.51 billion. Revenues from Cable Networks increased 20.3% to $4.24 billion. Broadcasting revenues were up 26.1% year over year to $2.27 billion.

Media Networks’ segment operating income decreased 3.2% year over year to $1.78 billion. Cable Networks’ operating income fell 1.5% to $1.26 billion. Broadcasting operating income declined 4.3% to $377 million.

Cable Networks’ operating income decreased due to a declined at ESPN, which was partially offset by the addition of 21CF businesses (mainly the FX and National Geographic networks).

ESPN’s results were negatively impacted by higher programming, production and marketing costs, somewhat negated by increase in affiliate revenues.

Higher programming costs were driven by rate increases for NFL, college sports and MLB programming. However, affiliate revenues benefited from contractual rate increases and the launch of the ACC Network, partially offset by a decline in subscribers.

The decrease in broadcasting operating income resulted from lower ABC Studios program sales, higher programming and production costs at the ABC Television Network, reduced advertising revenues and increased marketing costs.

Parks, Experiences and Products

The segment revenues (34.8% of revenues) increased 8.5% year over year to $6.66 billion.

Operating income went up 17.3% to $1.38 billion, driven by robust contributions from Consumer Products (merchandise licensing), Disneyland Resort and Disney Vacation Club.

Consumer Products operating income grew 36% year over year, primarily driven by higher licensing revenues from the Toy Story and Frozen merchandise, partially offset by a decrease in the Mickey and Minnie merchandise.

Operating income growth at Disneyland Resort was primarily owing to higher guest spending, driven by increases in average ticket prices and higher food, beverage and merchandise spending.

However, the growth in Disneyland Resort operating income was somewhat negated by expenses associated with Star Wars: Galaxy’s Edge, which opened on May 31 and lower attendance.

Disney Vacation Club operating income increased on higher sales at Disney’s Riviera Resort in the reported quarter.

Walt Disney World Resort results were flat year over year. Increases in guest spending (up 5%), and occupied room nights and attendance were offset by higher costs associated with Star Wars: Galaxy’s Edge, which opened on Aug 29 and cost inflation.

Disney stated that Hurricane Dorian adversely impacted Walt Disney World. The hurricane also negatively impacted attendance at the company’s domestic parks.

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

Moreover, per room spending at Disney’s domestic hotels was up 2%, and occupancy of 85% was flat year over year.

International parks and resorts operating income was also flat year over year, as growth at Disneyland Paris and Shanghai Disney Resort was largely offset by a decrease at Hong Kong Disneyland Resort.

Studio Entertainment Performance

Studio Entertainment segment (17.3% of revenues) revenues surged 52% to $3.31 billion.

Operating income soared 78.6% to $1.08 billion, backed by higher theatrical distribution results, partially muted by the 21CF business losses.

Theatrical distribution revenues benefited from the solid performance of The Lion King, Toy Story 4 and Aladdin.

The 21CF business operating losses resulted from a loss in theatrical distribution, primarily due to the lackluster performance of Ad Astra, Art of Racing In The Rain and Dark Phoenix.

Direct-to-Consumer (DTC) & International Interactive Media

The segment (17.9% of revenues) revenues came in at $3.43 billion, significantly up from $825 million in the year-ago quarter.

ESPN+ had more than 3.4 million paid subscribers at the end of the fiscal fourth quarter, while Hulu had approximately 28.5 million paid subscribers.

Operating loss widened to $740 million from $340 million in the year-ago quarter. Consolidation of Hulu, and ongoing investments in ESPN+ and Disney+ affected profitability.

The 21CF film studio reported an operating loss of almost $120 million in the reported quarter.

Other Quarter Details

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

Segment operating income increased 4.9% year over year to $3.44 billion. Consolidation of Hulu and intersegment eliminations marred profit by almost $300 million.

Free cash flow at the end of the quarter was $409 million compared with free cash flow of $2.65 billion reported in the year-ago quarter.

Outlook

For first-quarter fiscal 2020, Disney expects operating income at Hong Kong Disneyland to decline almost $80 million. Moreover, if the current trends continue (lower tourism due to political unrest), management expects fiscal 2020 operating income to decline $275 million over fiscal 2019.

However, domestic parks and resorts results are expected to benefit from the opening of Star Wars: Galaxy’s Edge at Walt Disney World and the December opening of Rise of the Resistance at Walt Disney World.

However, the revenue growth is expected to be partially offset by meaningful cost increase, primarily attributable to higher operating expenses associated with Galaxy's Edge and labor expenses due to higher wages.

So far this quarter, Disney’s domestic resort reservations have risen 5% year over year.

Management expects the DTC & International segment to report roughly $800 million in operating losses for the first quarter. Moreover, continued investment in DTC services, including ESPN+ and Disney+, and the consolidation of Hulu are expected to hurt DTC & International segment operating income by $850 million.

Further, theatrical releases of Frozen 2 and Star Wars: The Rise of Skywalker are expected to aid Studio Entertainment segment’s first-quarter results. However, 21CF film studio is expected to report operating loss of roughly $60 million.

Disney projects the 21CF acquisition and the impact of taking full operational control of Hulu to hurt fiscal first-quarter earnings before purchase accounting by 30 cents. Nevertheless, management expects the acquisition to be accretive to earnings before purchase accounting for fiscal 2021.

Furthermore, Disney expects fiscal 2020 consolidated capital expenditure to be $500 million higher than the figure spent in fiscal 2019, due to increase in spending at DTCI and corporate.

Moreover, the fourth quarter and fiscal 2020 results are likely to benefit from an extra week of operations.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

VGM Scores

Currently, Disney has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 trending upward for the stock, and the magnitude of this revision looks promising. Notably, Disney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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