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The latest Disney stock news: a review of the good and bad in FQ report

By Jayson Derrick

09:47, 20 February 2020

Disney stock news

Media and entertainment behemoth Walt Disney Company reported fiscal first quarter results on February 4 highlighted by a top-and-bottom-line beat. However, the encouraging quarter was somewhat offset by management’s lack of long-term guidance for its new streaming service, Disney+. The absence of any notable new Walt Disney stock news had some investors questioning if the streaming business is hot enough to offset any weakness elsewhere.

Q1 Review: what’s hot, what’s not 

Disney reported an EPS of $1.53 per share in the fiscal first quarter on revenue of $20.86 billion. By comparison, Wall Street analysts were expecting the company to earn $1.44 per share on revenue of $20.79 billion. Total segment operating income rose 9 per cent from the same period a year ago, from $3.655 billion to $4.002 billion.

Operating income by segment and its year-over-year change is broken down as follows and could aid investors who ask: is Disney stock a good buy right now? 

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  • Media Networks: up 23 per cent from $1.33 billion to $1.63 billion.
  • Parks, Experiences and Products: up 9 per cent from $2.152 billion to $2.338 billion.
  • Studio Entertainment: up more than 100 per cent from $309 million to $948 million.
  • Direct-to-consumer International: down more than 100 per cent from negative $136 million to $693 million.

Media Networks: ongoing issues

At first glance, the latest Disney stock news allowed investors to breathe a sigh of relief as all main segments reported year-over-year improvements. But digging beyond the headline numbers shows this isn’t the case, especially in the Media Networks business.

Investors should have reason to be concerned as the Cable Networks business generated more than 40 per cent of total company-wide profit in prior years. And within the Cable Networks business, the most important asset is ESPN.

Disney disclosed in its earnings report that its Cable Networks business reported a higher operating income but only due to accounting benefits from the consolidation of TFCF (FX and National Geographic networks) businesses. This was partially offset by a decrease in income at ESPN.

Disney not only said its star asset ESPN suffered from higher programming and production costs but lower advertising revenue and lower average viewership. The ongoing “cord-cutting” trend is showing no signs of reversing and Disney investors were left incrementally concerned after the earnings report as they were before.

While bull investors were quick to point out Disney is moving its sports channel online, the facts presented in the quarter aren’t reassuring. Disney reported a surge in ESPN+ customers from 1.4 million in the same quarter a year ago to 6.6 million. But over the same time period, average monthly revenue per ESPN+ customer fell from $4.67 to $4.44. Needless to say, the bullish case for Disney’s stock requires revenue per user growth in arguably the most important business to rise, certainly not fall.

Investors debating should I buy Disney stock right now may want to consider holding off for this reason alone.

Parks: roller-сoaster performances

Much like a roller coaster goes up and down, so was Disney’s performance in the Parks, Experiences and Products segment. Some metrics were up, while others were down.

Overall, the company deserves credit for reporting a year-over-year improvement in segment income. The growth came from higher merchandise licensing and better performance at domestic parks and resorts. On the other hand, the company saw overall lower results at its international parks and resorts.

Disney stock analysis

Breaking down the international performance shows more of the same roller coast-like results. Disney cited poorer than usual performance at Hong Kong Disneyland Resort while Shanghai Disney Resort saw improved attendance. Needless to say, the continued spread of the Coronavirus across China and the world will impact Disney’s international businesses. Investors could expect Disney’s performance in China to grind to a halt. 

Needless to say, the company shouldn’t be faulted but management cautioned it could lose $280 million and contribute another negative catalyst to Disney’s overall bottom line if the virus shows no signs of easing anytime soon.

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This alone doesn’t add much to the Disney stock buy or sell debate as the Coronavirus will impact nearly every company that does business in China. Had this been a Disney-specific catalyst the answer would be the latest Disney stock news is not encouraging.

Studio Entertainment: strong, it is

Disney’s Studio Entertainment division posted a notable increase in operating income, due to a strong quarter of top-quality film releases. Most notably, the quarter saw the debut of Star Wars: The Rise of Skywalker and Frozen 2 – two of the largest and most visible franchises in all of cinema.

Disney stock analysis

Investors should be reminded not to expect operating income to continue growing on a year-over-year basis by a factor of three.

The main Disney stock news: direct-to-consumer & international 

Far from the largest segment by any metric, the DTC & international business was perhaps the most closely watched by investors. During the quarter, Disney+ was launched after a much-anticipated wait and years of development.

Disney+ ended the quarter with a whopping 26.5 million users after just a few weeks of its launch. By comparison, Disney’s streaming service grew very quickly to 41 per cent, the size of Netflix’s US subscriber count.

Disney’s average monthly revenue per paid Disney+ user was $5.56 compared to Netflix’s monthly cost, which starts at $9 per month and goes as high as $16.

Several Wall Street analysts had already sounded the alarm bells that Netflix’s cost is just too high and this bodes well for Disney. See, Disney is already backed by major brands and franchises like Star Wars and Marvel so competition on the content side is a close battle.

Needham analyst Laura Martin believes Netflix could lose as much as 10 million subscribers in the US who will gravitate towards cheaper alternatives, like Disney.

Bottom line: investors wanted more

Disney’s streaming business has plenty of runway ahead for growth. Management has already targeted a user base of 60 to 90 million users by 2024. During the post-earnings conference call, Disney CEO Bob Iger did say its Disney+ user count has since risen to 28.6 million users. However, the CEO shied away from any revised long-term update. Across many large investors, the commonly held belief is that no news can’t be good news. 

So, investors are left a bit conflicted: just how good were the streaming results. According to Bernstein analyst Todd Juenger, a reading below 25 million would have been viewed negatively and a reading above 30 million would be positive. The end result of 26.5 million subscribers merely falls in the “comfort zone.”

And that’s where many long-term investors approach their Disney stock. They are comfortable to hold it but aren’t rushing out to buy new shares, nor are they necessarily in any rush to sell any shares. But this narrative can shift rapidly if the streaming business shows any signs of slowing down or the ESPN business starts degrading at a faster pace.

Read more: Netflix stock news: investor debate unresolved as Q4 report raises new questions

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