Entertainment and media conglomerate The Walt Disney Company (DIS – Free Disney Stock Report) issued weaker-than-expected fiscal third-quarter results (year ends September 30th). Investors were not pleased with the report, and the stock was down in early morning trading.
Earnings from continuing operations plummeted 59% from the year-ago period, to $0.79 a share, coming in $1.06 below our forecast. The top line also missed consensus expectations and was $1.255 billion short of our estimate. However, revenues climbed 33% year over year, to $20.245 billion.
Much of the media giant's fiscal third-quarter performance was overshadowed by the ongoing integration of the Twenty First Century Fox (21CF) assets and restructuring costs. To review, Disney acquired the bulk of that company's film and television assets in late March. What's more, the consolidation of the Hulu joint venture (it acquired 21CF's 30% interest as part of the merger) and rising operating expenses ahead of the autumn launch of Disney+ took their toll on the bottom line.
Nevertheless, the earnings report did have some bright spots. The company registered healthy top- and bottom-line gains at its Media Networks, Studio Entertainment, and Parks, Experiences & Products segments.
Contributions from the 21CF channels, specifically FX and National Geographic, helped to bolster Disney's Media Networks arm. Likewise, higher advertising and affiliate revenues at ESPN boosted revenues, offsetting rising programming and production costs.
Studio Entertainment's results were driven by the blockbuster success of Avengers: Endgame, Aladdin, Toy Story 4, and the carry-over success of Captain Marvel. And this more than offset a loss from the 21CF businesses and lower TV/SVOD and home entertainment distribution results at its legacy operations.
The Parks, Experiences & Products unit was mostly driven by increases at Disney's consumer products businesses and Disneyland Paris, which more than offset lackluster tallies from its domestic parks and resorts.
That said, the company posted steep losses in Direct-to-Consumer & International and Eliminations, which weighed on profits during the period.
Looking ahead, Disney ought to invest heavily in its brands and content. Though the media conglomerate incurred heavy expenses from the planned rollout of its direct-to-consumer streaming platform (scheduled for mid-November), we are optimistic Disney+ will boost the top and bottom lines down the road. Indeed, the subscription service will enable the company to compete with the likes of Netflix (NFLX) and Amazon.com's (AMZN) Prime Video. And Disney plans to fight to capture its share of cord-cutting audiences by uploading their legacy content, integrating and leveraging the Twenty First Century Fox library, as well as generating original programming for the platform.
Increased headwinds and dilution from the Twenty First Century Fox acquisition, rising expenses from business investments, and losses from the Direct-to-Consumer & International segment will likely continue to overshadow the success of its other operating units.
As a result, we have shaved $1.15 from our full-year fiscal 2019 share-net estimate, and now look for the bottom line to slip 9% year over year, to $7.60.
All told, the synergies from the Fox addition, as well as management's plan to better monetize its content library, should position the media conglomerate for growth over the long haul, and we believe DIS shares will continue to build steam over the next 3 to 5 years. That said, the blue chip has gained a lot of momentum over the last few months, and patient investors may want to wait for a pullback in price before jumping in.
About The Company: The Walt Disney Company operates Media Networks such as ABC and ESPN, and Studio Entertainment. Its world famous parks and resorts include Disneyland, Walt Disney World (Magic Kingdom, Epcot, and Disney’s Hollywood Studios), while the company earns royalties from Tokyo Disneyland and manages Disneyland Resort Paris and Hong Kong Disneyland. It also operates a cruise line and Consumer Products and Interactive Media segments. ABC was acquired in February, 1996; Pixar in May, 2006; Marvel in December, 2009; and Twenty First Century Fox in March, 2019.
— Orly Seidman
