Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Can Walt Disney Co Stock Regain Its Mojo?

By Leo Sun - Aug 14, 2016 at 2:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors should ignore the short-term noise about ESPN and focus on the House of Mouse’s core strengths.

Disney ( DIS 0.06% ) stock has been stuck in a rut, slipping about 10% over the past 12 months even as its massive franchises conquered the box office and it opened a new resort in Shanghai.

The main concern was the same over the past few quarters -- that cord-cutters could gut its cable business, which generated nearly half its operating income over the past nine months, and that ESPN was losing subscribers despite its market-leading position in live sports -- a market that was considered immune to over-the-top alternatives.

Image source: Pixabay.

Last quarter was no different. Disney's sales rose 9% annually to $14.3 billion, beating estimates by $130 million and marking an acceleration from 4% growth in the previous quarter and 5% growth a year ago. Net earnings improved 12% to $1.62 per share, topping expectations by a penny.

Yet the stock barely budged after those robust results. Let's take a closer look at what happened during Disney's third quarter and what it will take for the stock to regain its mojo and finally rally.

What went right for Disney

The Studio Entertainment unit was the standout performer for Disney during the quarter, with the robust box office performance of Captain America: Civil War, The Jungle Book, and Finding Dory easily offsetting less impressive numbers from Alice Through the Looking Glass and The BFG.

Revenues at the unit rose 40% annually and accounted for 20% of Disney's top line. Operating income improved 62% and accounted for 17% of its operating profits. Upcoming films like Moana, Marvel's Doctor Strange, and Rogue One: A Star Wars Story should boost ticket sales through the end of the year.

Image source: Marvel Studios.

The parks and resorts business also remained strong, with revenue rising 6% and operating income improving 8%. That growth was reassuring, since some investors had been concerned that the Orlando shootings and lower visits from Brazil (the city's second largest international market) would throttle overall theme park attendance. The unit generated 31% of Disney's sales and 22% of its operating profits. CEO Bob Iger also called the opening of the Shanghai Disney Resort on June 16 a "spectacular success" with over 1 million visitors to date and hotel occupancy rates holding steady at 95%.

To counter cord-cutters, Disney is buying a 33% stake in Major League Baseball's BAMTech streaming media unit. Disney plans to use that investment as the foundation of a new stand-alone OTT platform for ESPN. Disney's rival Time Warner ( TWX ) also made similar moves with its stand-alone HBO Now service and its purchase of a 10% stake in streaming service Hulu, which is still primarily controlled by Disney, Fox, and Comcast.

Disney will also bundle its main channels (ESPN, ABC, Freeform, and the Disney Channels) into AT&T's ( T -0.80% ) DirecTV Now packages in the current quarter. That move could boost subscriber numbers, since AT&T is "locking in" subscribers by giving them unlimited wireless plans with DirecTV subscriptions.

What went wrong for Disney

Unfortunately, growth at Disney's media networks business -- which accounted for 41% of its revenue and 53% of its operating income -- remained tepid. Revenue rose 2% and operating income stayed flat, due to weaker ad growth at the Disney Channels and Freeform, and lower equity income from A&E. Ad revenues also fell 4% at ABC due to lower ratings. That softness overshadowed an operating income boost from higher affiliate and ad revenues at ESPN, which was partially offset by a decline in subscribers and higher programming costs.

ESPN on PlayStation Vue. Image source: ESPN.

Simply put, the media networks business remained a mixed bag that still squeezed out positive year-over-year growth despite losing subscribers. We won't know Disney's exact subscriber numbers until it releases its 10-K filing at the end of the year, but the numbers have been steadily declining over the past few years.

Disney's only shrinking business was its consumer products and interactive media division, which accounted for 8% of its sales and 7% of its operating profits last quarter. Sales and operating income, respectively, fell 1% and 7%, but those declines were expected due to the discontinuation of its Infinity games and collectible figures, exacerbated by unfavorable comparisons to higher sales of Frozen merchandise last year.

Take the long-term view

Over the next few quarters, analysts and investors will likely remain focused on ESPN and the health of its cable business. But we should note that Disney is still squeezing out top and bottom line growth from the business, and its transition toward new pay TV and streaming platforms could stop the bleeding.

Meanwhile, Disney's movie and theme park businesses are gaining momentum, and could eventually reduce the overall weight of its media business -- thus preventing the "hard landing" that some bearish analysts are predicting. Therefore, I believe that Disney is still a great investment that will eventually regain its mojo, but investors should take the long-term view and ignore the claims that ESPN's softness will somehow sink the whole company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$23.09 (-0.80%) $0.19
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$150.46 (0.06%) $0.09
Time Warner Inc. Stock Quote
Time Warner Inc.
TWX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
633%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/07/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.