Disney Earnings Preview: ESPN+ and a Big Acquisition

Entertainment giant Walt Disney Co. (DIS) reports fiscal third-quarter earnings after market close on Tuesday, August 7. Here’s a look at what might be expected from its quarterly results.

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The Walt Disney Co. (DIS) is scheduled to report fiscal third-quarter earnings after market close on Tuesday, August 7. Between the company’s new streaming services and its pending acquisition of 21st Century Fox (FOXA), it’s been a busy quarter.

For fiscal Q3, DIS is expected to report adjusted EPS of $1.97 on revenue of $15.32 billion, according to third-party consensus analyst estimates. In the same quarter last year, adjusted EPS came in at $1.58 on revenue of $14.24 billion. 

Media Networks

DIS’ Media Networks division has been struggling for some time as consumers have increasingly transitioned from cable TV to subscription streaming services. In fiscal Q2, revenue was up 3% year over year to $6.1 billion, although operating income declined 6% to $2.08 billion, according to the company. 

Management attributed the decline in operating income to higher programming costs at ESPN, lower advertising revenues from Freeform, and an operating loss at BAMTech, the video streaming technology company that DIS acquired in 2017. Analysts are again widely expecting similar results from the Media Networks segment in fiscal Q3. 

ESPN+ was launched in April, so this will be the first quarter that includes results from DIS’ new subscription streaming service. Down the road, DIS plans to launch its broader streaming service at the end of 2019.  

During the quarter, the big news was DIS outbidding Comcast (CMSCA) to acquire FOXA in a $71.3 billion deal. The deal has been approved by shareholders of both companies, but it is still working its way through regulatory approvals in some countries. 

Parks and Resorts

In fiscal Q2, DIS reported that Parks and Resorts revenue increased 13% year over year to $4.88 billion, while operating income grew 27% to $954 million. Easter fell in fiscal Q2 this year, whereas it was in fiscal Q3 last year. Management acknowledged this shift as a benefit when it last reported, and it’s expected to be a headwind due to the shift in traffic from the holiday. 

Management also highlighted both labor and cost inflation as two headwinds that have been impacting this segment. 

The company currently has a variety of expansion projects underway at its parks and resorts. Toy Story Land opened at Disney World in June. Further out, the company said it plans to open Star Wars: Galaxy’s Edge at both Disneyland and Disney World by the end of 2019. 

DIS’ capital expenditures at domestic resorts were up 29% year over year in fiscal Q2, totaling $1.4 billion. That increase was partially offset by a $272 million decline in capital expenditures at international parks and resorts.  

Studio Entertainment

DIS had a couple of major movie releases during the quarter and analysts are widely expecting strong results from this segment. Avengers: Infinity War was released at the end of April and The Incredibles 2 came out in mid June. Both of the movies topped the lists for highest-grossing films between April and June. 

In fiscal Q2, DIS reported that studio entertainment revenue increased 21% year over year to $2.5 billion, while operating income grew 29% to $847 million. 

Disney 2018 Stock Chart. DIS has rallied since the beginning of June and has climbed to new 52-week highs during today’s session. The stock is still a little ways from its all-time high of $122.08 hit back in mid-2015. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Disney Options Trading Activity 

Options traders have priced in a 4% stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility started the day at the 52nd percentile and was at the 62nd percentile by midday. 

In short-term trading at the August 10 weekly expiration, calls have been active at the 115 and 116 strike prices, while puts have been active at the 112 and 113 strikes. Over the past week, the stock has mostly been trading right between those strikes. 

At the August 17 monthly expiration, trading on the call side has been heavier at the 115 and 120 strike prices. On the put side, recent trading has also been concentrated at the 115 strike price. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,
JJ

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