Disney Earnings to Hinge on Theme Parks, Avatar Sequel

The drama at Walt Disney (DIS) will be in full focus Wednesday afternoon when the entertainment giant reports quarterly earnings for the first time since its board of directors abruptly fired CEO Bob Chapek after a dismal earnings report.

Disney dumped Chapek in favor of his estranged mentor Bob Iger after a Chapek protégé, CFO Christine McCarthy, went to the board with concerns about the performance of her boss. Analysts expect fiscal first-quarter adjusted earnings of 77 cents per share on average, down from $1.06 per share a year earlier, according to estimates tracked by Visible Alpha.

The 71-year-old Iger, who served as Disney CEO from 2005 to 2020, returned to the company with a mandate to stem mounting losses from its streaming service and figure out whether Disney should shed TV assets in decline amid cable cord-cutting. He is under pressure to deliver evidence of a quick turnaround to defeat a board seat bid by activist shareholder Nelson Peltz, and to find a successor who would take over by late next year.

Iger has already reversed some of Chapek's controversial changes, including restoring control over release schedules to content production executives from a centralized distribution team. The company is also considering licensing more content to rivals to offset Disney+ costs that saddled the streaming platform with a loss of nearly $1.5 billion in the most recent quarter.

Iger could use Wednesday's report to tip his plans for any reshuffle of Disney assets, including the Hulu streaming service the company owns jointly with archrival Comcast (CMCSA). Iger has said the future of Disney's TV assets including ESPN sports channels and the ABC broadcast network is under a cloud, stoking speculation Disney may spin off ESPN.

"We expect Bob Iger’s first public call since returning as CEO to be action packed," Wells Fargo analysts said recently, after predicting earlier that Disney will move to shed ESPN. "With a proxy battle looming, management’s best avenue to defend against activism is a higher stock price."

The expected erosion of Disney's TV earnings was a key factor in the company's November forecast, in which it predicted single-digit growth for companywide fiscal 2023 earnings before interest and taxes, below consensus estimates for a gain of 25%. Disney's Linear Networks segment including ESPN and ABC is expected to see a revenue decline of about 5% year-over-year for Q1, and a drop of 19% in segment operating income.

ESPN and ABC's National Basketball Association broadcast rights contract expires in two years. The company could face stiff competition from deep-pocketed technology giants Apple (AAPL), Amazon.com (AMZN), and Alphabet (GOOG, GOOGL) pushing into the sportscasting arena.

Theme parks, Disney's top earner, should show a revenue gain of 12%, with segment operating earnings up about 8% based on analyst estimates. Iger recently announced several cosmetic changes addressing some of the visitor complaints about admission rule changes adopted under Chapek. Guests have also complained about slipping park maintenance and upkeep, concerns echoed by Peltz.

The segment's future profitability will be in focus after unions representing some 32,000 Walt Disney World workers overwhelmingly rejected the company's latest contract offer.

Disney's quarter received a welcome boost from Avatar: The Way of Water, the James Cameron-helmed sequel that's generated more than $2 billion in box-office receipts worldwide, allowing Disney to break even on the film's $350 million cost.

Disney's share price has risen 25% in 2023 after dropping 44% last year. Over the past year, the stock's decline of 21% has left it trailing the 16% drop of the S&P 500 Consumer Discretionary Sector Index (see chart below).

Disney Key Stats

_{Source: Visible Alpha}