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Disney Earnings Preview: ESPN and New Streaming Services

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November 8, 2017
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The Walt Disney Co. (DIS) reports fiscal fourth-quarter earnings after the closing bell on Thursday, Nov. 9. The upcoming earnings announcement has been a bit overshadowed by recent reports from several media outlets that DIS had been in talks with 21st Century Fox (FOX) to purchase a large portion of the latter’s entertainment businesses.

So far analysts have appeared positive regarding a potential deal’s impact on both companies, although nothing concrete has materialized yet and the talks are reportedly on hold due to disagreement over terms and price. For DIS, the move could expand its movie and TV production assets, as well as potentially increase its exposure to international markets. For FOX, the deal would leave behind a smaller company focused primarily on news, business and sports, as well as its local broadcasting affiliates.

The news comes not too long after DIS announced it had invested an additional $1.58 billion in streaming video specialist BAMTECH Media to increase its ownership in the company from 33% to a controlling stake of 75%. At the same time, management said it will launch a new, direct ESPN service in early 2018 and a Disney-branded streaming service in 2019. As a result of the new Disney-branded streaming service, DIS decided to end its distribution agreement with Netflix (NFLX), and CEO Bob Iger said “these announcements mark the beginning of what will be an entirely new growth strategy for the company.”

DIS has been shifting strategies as its media networks segment has faced declining revenue and profits, which management has largely attributed to ESPN. In the fiscal third quarter, revenue in that segment declined 1% year-over-year to $5.87 billion, while operating income declined 22% to $1.84 billion, with DIS citing higher programming costs, lower advertising revenue, and severance and contract termination costs at ESPN as the reason for the decrease in operating income.

The studio entertainment segment has also faced pressure in recent quarters. In the fiscal third quarter, DIS reported revenue in that segment declined 16% year-over-year to $2.39 billion and operating income declined 17% to $639 million. Historically, the fiscal fourth quarter has been the slowest for the studio entertainment segment. In fiscal 2018, DIS has quite a few films slated for release, with Star Wars: The Last Jedi hitting theaters in December, and two Pixar films, four Marvel movies, among others, coming out later.

While the media networks and studio entertainment segments have faced some pressures in recent quarters, the parks and resorts segment has seen the fastest growth. In the fiscal third quarter, DIS reported that parks and resorts revenue grew 12% year-over-year and operating income increased 18% to $1.17 billion. Management attributed that growth to strength in its international operations. 

Disney stock chart showing YTD performance and implied volatility on the thinkorswim platform

FIGURE 1: DISNEY YTD PERFORMANCE.

Disney (DIS) is down 4.21% year-to-date, although shares are well off their high of their 2017 high of $116.10. Ahead of tomorrow’s earnings report, implied volatility is at the highest it has been all year. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Disney Earnings and Trading Activity

For its fiscal fourth quarter, DIS is expected to report adjusted earnings of $1.12 per share, two cents above last year’s results, on revenue of 13.15 billion, pretty much flat to last year’s $13.14 billion, according to third-party consensus analyst estimates. DIS beat earnings estimates in three out of the four past quarters, while revenue missed estimates in all of them. 

Speaking at the Bank of America Merrill Lynch 2017 Media, Communications & Entertainment Conference in September, CEO Bob Iger warned that earnings per share for fiscal 2017 would be “roughly in line” with the $5.72 per share it earned in fiscal 2016, putting expectations for this quarter’s result around $1.09 per share. In the last 4 weeks, 14 analysts have revised their earnings estimates downwards for the fiscal Q4.

Iger’s comments also sent the stock down a little over 4% on September 7. Since then, shares have recovered to where they were before that drop and closed at $101.61 yesterday. Options traders have priced in about a 3% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the November 10 expiration, calls have been active at the 102 and 103 strike prices. On the put side, most of the trading has been concentrated at the 100 strike. As of this morning, implied volatility is on the high end at the 98th percentile.

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.

Looking Ahead

As retailers head into their busiest time of the year, we’ll get a look at how consumers are feeling about economic conditions on Friday morning when the University of Michigan releases its Consumer Sentiment Index.  Tomorrow, a string of retailers that includes Kohl’s (KSS), Macy’s (M) and Nordstrom (JWN) report quarterly results, potentially providing a look at what some of them are expecting for the holiday shopping season.  Also, make sure to check out the October 2017 Investor Movement Index ®  to see how TD Ameritrade’s retail clients positioned themselves in the market last month.

Good Trading,
JJ
@TDAJJKinahan

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