In many ways, Walt Disney Co. (ticker: DIS) is having a perfectly fine 2017. DIS shares are up about 7.5 percent to slightly beat the market, and operationally speaking, most of the company’s businesses are well-oiled and running smooth.
But we all know that’s far from the whole story. One of Disney’s most crucial divisions is cracking, and the stock recently broke down in sudden fashion from what had been a smooth ride north for most of the year.
As a result, investors should expect Disney’s earnings release on Tuesday afternoon to be one of the most captivating reports on the docket this week.
The headline numbers. Earnings and revenue estimates are called the “headline numbers” because they’re typically the figures investors are most interested in. Though in Disney’s case, fiscal second-quarter estimates should be buried on the inside pages. Disney’s profits are expected to climb just 3.7 percent higher to $1.41 per share on sales forecast to grow by the same amount, to $13.45 billion.
That’s not an isolated quarter. Disney’s theme for 2017 is “muted,” with analysts expecting just 2.3 percent top-line growth and 4 percent bottom-line growth before returning to more robust performance in 2018.
What’s holding Disney back?
The ESPN problem. Disney’s Media Networks division accounts for roughly 40 percent of the company’s revenue, and ESPN is responsible for the lion’s share of that. For years, that was a point of strength for the entertainment conglomerate, but no more.
Hints of trouble have been brewing since 2014, as higher expenses for programming such as baseball and the FIFA World Cup started to cut into the division’s profitability. However, that snowball soon became an avalanche, as a growing exodus of subscribers compounded ESPN’s issues.
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In August 2016, for instance, Nielsen estimated that over the prior 52 weeks, ESPN shed more than 4 million subscribers, resulting in $350 million of lost revenue. In November, ESPN lost 621,000 subscribers — its worst month ever — followed up by a December drop of 550,000. This is all being prompted by a growing migration to streaming services thanks to skyrocketing cable costs.
ESPN is bleeding hard, and its content costs keep rising, thanks to monster contracts such as its $1.47 billion annual deal with the NBA, and $1.9 billion annual rights for Monday Night Football. In a November analysis, Outkick the Coverage demonstrated the potential for disaster with a conservative estimate of 3 million subscriber losses per year that would put ESPN at 74 million subscribers in 2021. If that played out, and even if ESPN’s subscriber fees climbed from their current $7 per month to $8 million, “that’s $7.1 billion in subscriber revenue … less than the yearly rights fees cost in 2017.”
Disney has tried to counter its issues with several rounds of layoffs at ESPN, including shedding on-air talent that included the likes of NFL analyst Trent Dilfer, NFL reporter Ed Werder and MLB reporter Jayson Stark.
The real crime is that ESPN is holding back what is otherwise a good-looking company.
Reasons for optimism. In a March upgrade note in which Guggenheim admitted a “cautious view” on the Media Networks division, analyst Michael Morris also said “we still see strong potential upside to relatively conservative estimates and anticipate valuation multiple expansion as the company enters another robust film, consumer products and parks expansion cycle.”
Disney’s acquisitions of both LucasFilm and Marvel are the gifts that keep on giving, with the company churning out several blockbusters every year, not just driving film revenue, but subsequent products in the form of superhero and Star Wars toys.
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While Disney deserves heaps of praise, though, it shouldn’t be for the massive numbers of the Avengers-related films or the biannual Star Wars core releases, which frankly would’ve been difficult to flub. Where Disney has really excelled is its ability to beat all expectations in somewhat lesser areas, such as “Rogue One: A Star Wars Story” that crushed Disney’s box-office projections, or “Guardians of the Galaxy,” a lesser-known Marvel comic whose first film brought in $774 million globally and landed Disney a substantial profit … and whose sequel, released this past weekend, notched Marvel its 15th consecutive No. 1 opening at the box office.
Theme parks have also been a source of strength, including a profit jump of 13 percent last quarter.
And for a little pie in the sky, Citi analyst Jim Suva gave an Apple ( AAPL) acquisition of Disney a 20 percent chance of happening — the second-best odds among seven potential targets he listed.
Disney has plenty of good things going for it. But ultimately, the bears will continue to pounce on any weakness at ESPN. That’s the thing to watch on Tuesday.
Fair or not, everything else is just noise.
More Earnings in Focus
Snap (SNAP): A few months ago, you would’ve expected Wall Street would enter Snap’s first-ever earnings report with high anticipation. But as we head into Wednesday night, the feeling is more trepidation, with the company actually down about 5 percent since its first day of trading back in February. Analysts are expecting Snap to report a loss of 19 cents per share on revenues of $158.1 million. But make no mistake: What everyone will care about most is user numbers (Cowen analyst John Blackledge expects daily active users of 167 million) and what effect Facebook’s ( FB) efforts to copy Snapchat’s features have had on the social platform’s popularity.
Nvidia Corp. (NVDA). Nvidia shares are pacing to come up ever so shy of last year’s roughly 225 percent returns, with the stock down 3 percent through four months and change so far in 2017. The stock has suffered a few downgrades in 2017, including by Pacific Crest, who in April cut its earnings estimates for both fiscal 2018 and 2019, believing growth for desktop graphics card makers is dead in the water. Analysts actually have high hopes for Nvidia’s first quarter, estimating earnings to more than double to 67 cents per share on top-line growth of 46.2 percent to $1.91 billion — but the bar might be too high to allow for a momentum-changing beat.
This Week’s Earnings Calendar
Monday. AMC Entertainment Holdings ( AMC), JD.com ( JD), Sturm Ruger & Co. ( RGR), Sysco Corp. ( SYY), Tyson Foods ( TSN)
Tuesday. Duke Energy Corp. ( DUK), Electronic Arts ( EA), Fossil Group ( FOSL), Priceline Group ( PCLN), SunPower Corp. ( SPWR), TripAdvisor ( TRIP), Valeant Pharmaceuticals International ( VRX), Yelp ( YELP)
Wednesday. Mylan N.V. ( MYL), Wendy’s Co. ( WEN), Whole Foods Market ( WFM)
Thursday. Macy’s ( M), Teva Pharmaceuticals ( TEVA), Weibo ( WB)
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Friday. JCPenney Co. ( JCP)
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Walt Disney Co. (DIS) Earnings: ESPN, And Everything Else originally appeared on usnews.com
