Parks & Movies Boost Disney, While the Media Segment Struggles

The Walt Disney Company (NYSE: DIS) reported earnings (PDF link) after the market closed on Tuesday, May 8^th, and the “House of Mouse” posted solid results, driven primarily by blockbuster movies and attendance at its amusement parks:

• Net revenue of $14.5 billion, up from $13.3 billion (9% increase year-over-year)
• Net income of $2.94 billion, up from $2.39 billion (23% increase YOY)
• Earnings of $1.95 per share, up from $1.50 per share (30% increase YOY)

If you’ll recall from a few weeks ago, Disney was one of two investments that I was keeping a close eye on. I was concerned about the subscription base of the company, with carriage fees from cable companies providing a steady stream of revenue for the entertainment behemoth. However, in recent years, Disney has been losing subscribers as more and more people “cut the cord” and access their entertainment through non-cable providers like Hulu or Netflix. The draw of live sports just hasn’t been enough to keep people subscribed to cable, especially when most major sporting events are televised on stations that can be viewed by using an antenna if so desired.

The media segment at Disney, which includes ESPN and all of its other programming, experienced a loss during the quarter despite an increase in revenues. The company mentions a decline in subscribers being offset by an increase in rights fees, but also blamed a shift in the schedule for the College Football Playoff. This is something that could be variable from year-to-year, but should also only affect the company during its second fiscal quarter every year, so we won’t know if the shift to digital has continued to affect this especially lucrative part of its sports business until next year. Nevertheless, ESPN is moving forward with a stand-alone service for its sport content – called ESPN+ – currently priced at around $5 a month, so I will monitor the growth of those numbers should Disney report them in the future.

Luckily for Disney – and its shareholders – there is more than just the media side of things driving performance, with revenue and income from parks and resorts and studio entertainment driving the quarter’s performance. Parks and resorts revenue was up 13%, with income increasing 27%. Studio entertainment did even better, with revenue increasing 21% and income increasing 29%. The two segments combined exceed the revenue of the media networks, and they will probably continue to drive the actual performance of the company going forward, or at least as long as there is a blockbuster Marvel or Star Wars movie each quarter and people fighting the lines at the parks. If its subscription service can also turn a profit, Disney might return the solid performance it experienced back when ESPN was driving the train.

Nevertheless, all these results reflect what the company has done in the past, but you should only invest in a company for what they might do in the future. Unfortunately, Disney does not provide guidance for the rest of the year, but we can see what the batch of analysts that follow the company think for the remainder of the year. The average estimate for full-year earnings is $6.90 per share, which would be a 21% increase over fiscal year 2017 for the company. Disney’s P/E is currently about 15.7, so we should expect to see a price at year end of around $108, which would be around 6% upside from its current price.

If ESPN+ can gain subscribers while the parks and movies continue to do well, investors should be happy with the company’s performance over the next six months. However, it does bear monitoring closely, at least with the quarterly results, to ensure that they remain on pace to meet the analysts’ lofty expectations. I plan on holding for now and hope for the best from the media side of the “House of Mouse.”

Until next time…

Disclosure: I have purchased shares of The Walt Disney Compnay on behalf of my mother and have no intentions of adding or selling shares over the next 30 days. Please read my full disclosure here.