Walt Disney Co. (DIS) CEO Bob Iger has transformed the diversified company's image and longterm outlook in recent months. With his $71.3 billion deal to buy the entertainment assets of 21st Century Fox, Disney is now regarded as a fast-moving leader in the streaming entertainment revolution instead of as a traditional Hollywood movie maker. That's a big reason Disney shares are up about 28% this year, way ahead of the market.
What Disney Investors Are Watching For
Disney investors are likely to focus on the company's longterm streaming ambitions and other short-term issues when it reports fiscal third quarter earnings on August 8. They'll focus on the revenue impact of Disney’s “Avengers: Endgame,” which was released on April 26 and has since become the highest-grossing film of all time. Investors will also be interested in the impact of the May opening of the company’s “Star Wars: Galaxy’s Edge” destination at Disneyland. In the short term, investors also will see losses from continued investments in its new direct-to-consumer (B2C) business segment, contributing to a year-over-year decline in earnings. Disney has been investing heavily in its direct-to-consumer streaming services, including ESPN+ and Hulu.
Analysts’ 2Q Estimates
Analysts are expecting upcoming quarterly revenues to grow 41.2% from the year-ago quarter, bolstered by the one-time 21st Century Fox deal. However, analysts estimate a 5.9% fall in earnings-per-share (EPS). These estimates have fallen more than 3% from 90 days ago, according to data from Yahoo! Finance.
The boost to revenues looks exceptional compared to those reported in the prior quarter. For the three-month quarter through the end of March, revenue grew just 2.8% year over year. EPS surprised analysts’ estimates but were 12.5% lower than they were a year ago, according to Disney.
Disney’s Largest Sales Driver
Disney’s Parks, Experiences and Products segment is the company's big driver in the short term. It generates over 40% of its total sales, making it the company’s largest source of revenue. During the last quarter, revenue grew 5% and operating income increased 15% to $1.5 billion. Also, the business segment acts as a barometer for the American consumer, which is currently showing signs of weakness. The Consumer Confidence Index (CCI), after months of improvement, recently fell to the lowest level since 2017, according to The Conference Board.
Disney’s Direct-to-Consumer & International Segment, which reflects its ongoing investments in the ESPN+, Hulu, and its Disney+ streaming app, saw operating losses widen to $393 million last quarter from losses of $188 million in the year earlier quarter. Disney does not expect its video-streaming app, set for release this fall, to start making money until 2024, according to a Bloomberg column.
A big question is how long investors will tolerate big short-term losses for the prospect of longterm profits in streaming that are years away. Until then, Disney will have to depend on its traditional businesses to pick up part of the slack.