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Disney Stock Drops on Earnings Miss but Don’t Bet Against It

Last Updated September 23, 2020 12:52 PM
Lawrence Meyers
Last Updated September 23, 2020 12:52 PM

The Walt Disney Company reported third-quarter earnings on Tuesday. Despite some very impressive numbers, earnings were hurt by the digestion of Fox Studios and costs associated with its new streaming service.

Let’s look at the headline numbers and dive into the most important metrics to see where Disney had trouble and what to expect from the stock going forward.

Breaking Disney Down

Diluted earnings per share, excluding certain one-time items, fell 28 percent from $1.87 to $1.35 in the prior-year quarter. EPS for the nine-month period fell 15 percent to $4.75 from $5.60.

Neither Cable Networks nor Broadcasting were the culprits in the revenue decline.

Cable Networks revenues increased 24 percent to $4.5 billion; the segment’s margins were excellent, delivering about 35 percent gross margin to bring operating income to $1.6 billion, up 15 percent.

The Fox additions of revenue from FX and National Geographic were a big boost.

Also, after what seemed like years of bumbling, ESPN finally saw an increase in earnings from higher advertising and affiliate revenue. The network at long last got smart and banned political talk from its anchors, which had soured many viewers on the network.

Broadcasting saw a 16 percent increase to $2.2 billion in revenue, but net income fell 17 percent to $303 million. The ABC studio and network are having trouble selling advertising for programming.

Parks and Movies Are Where It’s At

Parks, Experiences and Products revenues increased 7 percent to $6.6 billion, generating operating margins of almost 17 percent ($1.7 billion). That’s a 4 percent increase.

This segment is going to be a primary driver for Disney stock going forward. The parks have strong pricing power, and the push toward more “Star Wars” experiences is a big contributor. There are additional costs to be absorbed as Disney pivots, but that will pay off.

Of course, Disney stock has always been driven by merchandise licensing and retail, both of which grew thanks to “Toy Story 4.”

Disney stock is also going to be an ongoing winner because of its Studio Entertainment division, where revenues grew 33 percent to $3.8 billion and operating income increased 13 percent to $792 million, creating gross margins of 21 percent.

This was a monster quarter for the division thanks to the release of “Avengers: Endgame,” “Aladdin,” “Captain Marvel,” and “Toy Story 4.”

Direct-to-Consumer and International revenues exploded from $827 million to $3.858 billion, but the segment’s operating loss increased from $168 million to $553 million.

This was expected, as Disney had to spend a lot of money to consolidate Hulu, ramp up ESPN+ streaming service, and ramp up Disney+.

A Company in Transition

What we see is Disney is in a transitional period as it spends a lot of money to incorporate the Fox assets and pivots strategically toward streaming and park content changes.

Disney is going to provide some major problems for Netflix. The Disney+ basic subscription will only be $6.99 per month. Consumers can bundle it with both ESPN+ and ad-supported Hulu for only $12.99.

This is also going to create more cord-cutting at the cable and satellite providers. ESPN is a popular reason why people stick with these choices. As long as it stays away from politics, consumers who have children will have ample reason to take the bundle. The Disney content is for the kids, ESPN is for the sports-watching fathers, and Hulu provides a wide range of programming.

Netflix is in trouble, and making more shows for kids won’t help.

As for Disney stock, it’s down 4 percent in after-hours trading and up 22 percent over the past year.

Disney Stock 1 year chart | Source: Yahoo Finance

Despite this, Disney stock remains the singular diversified entertainment play in the stock market with an amazing array of content. It’s foolish to bet against it.

Disclaimer: This article is intended for informational purposes only and should not be taken as investment advice.