In this segment of the MarketFoolery podcast, host Mac Greer is joined by Motley Fool analysts Andy Cross and Matt Argersinger to talk about Disney's (NYSE:DIS) first-quarter earnings, which were more than solid: Studio revenue was up, with both its media networks and its parks and resorts segments beating expectations. Yet investors on the whole remained pessimistic.
The ESPN situation just continues to drag on Disney: Are cord-cutting fears overblown? And what's next in the Fox (NASDAQ:FOX) (NASDAQ:FOXA) asset deal, now that Comcast (NASDAQ:CMCSA) is sticking its thumb on the scale? The Fools look at the details from its segments -- in particular, its superpowered movie studios -- and point to the direction they think Disney ought to take its business.
A full transcript follows the video.
This video was recorded on May 9, 2018.
Mac Greer: Let's begin with Disney, which reported better than expected earnings after the market closed on Tuesday. Now, Matt, I look at these numbers -- Studio revenue up 21% thanks to Black Panther. Disney's biggest division, its Media Networks, beat expectations. Its second-biggest division, which is its Parks and Resorts, beat expectations. So, I quote the stock this morning because I'm excited, because I'm a Disney shareholder, and the stock is down! What gives?
Matt Argersinger: [groans] Mac, everyone loves Disney except for investors, apparently. I'm also a shareholder. I think what's happening right now is that investors are just so focused on the ESPN, the cable issues, cord cutting, and this 21st Century Fox deal, which kind of got a [...] bid from Comcast over the last few days, which has thrown a wrench in things there. It's easy right now for investors, I think, to ignore all the really good things that are happening. As you mentioned, I think the Networks business, which has beared the brunt of challenges, is actually outperforming. Actually, revenue was up 3% year over year, even though profits were down a bit.
But, the Studio business, up 21%. We know Black Panther was a massive hit. The one thing that people have said about the Studio business, for Disney or many other companies, is that it's a hit-driven business. You'll have a blockbuster one quarter, and you might have a total bomb the next quarter. But, I think Disney is kind of in its own league. I think Disney has the ability to put out a great blockbuster movie, a billion-dollar movie, every quarter, if you think about it. Just use this year as an example. We have Black Panther last quarter. We have Avengers Infinity War, which has already crossed $1 billion, and worldwide is going to make multi-billion dollars at the box office. And then, later this summer, you have Incredibles 2 and the Solo movie for Star Wars. I mean, there's just so much from that library, and I just think investors right now are so focused on the challenges with the cable business and Fox acquisition that they're ignoring the other parts of the business like the Studio and the Parks.
Andy Cross: I think that's an interesting point, Matt, the Studio business becoming more consistent. The Media Networks has always been that consistent cash business. When you're basically flat-lined on sales and down on your income because you're investing in things like their BAMTech business, continuing to invest into basically helping to support that business. But the eyeballs and the impressions are just continuing to melt away. Investors look at that and say, "If you can't fix that in that cash part of the business, that's going to be long-term trouble for Disney on that side," even though the Studio business and the Parks and Recreation business, which go hand-in-hand, are so strong right now.
Greer: Andy, you say that, but when I look at the Avengers numbers right now, which are just astronomical -- it's about to pass Black Panther already, it hasn't even opened in China. And we're just talking about the movie. We're not talking about licensing yet, we're not talking about all of the implications for theme parks. So, The Avengers and the Studio business, that's not enough, as an investor?
Cross: It might be. But here's a business that spends $4 billion in capital expenditures, and they spend twice as much of that in stock buybacks every year. The stock sells at 15X earnings. So, this is really much more of a consistent, value-orientation stock, rather than the big growth story that we've seen from the Amazons and the Baidus and those wonderful businesses that we follow. So, I think investors are just trying to figure out, you want all three of these businesses to be very consistent. The Studio business is having these really nice, huge wins. But, the Media business, which is the largest business, has to figure out a way to stem those losses on there.
Argersinger: I'm glad, Andy, you mentioned the buybacks. In the last 12 months alone, Disney has bought back $9 billion in stock. You go back five years, they've actually bought back 15% of the total outstanding shares. I know the stock hasn't done much lately, but over that five-year period, the stock is up 50%. So, that's been a great, great investment for shareholders.
But I have to say, I actually think this new Comcast bid for 21st Century Fox, if that eventually gets approved and they outbid Disney, that actually might work out for Disney. I think this deal is going after some legacy assets, some legacy entertainment properties. I think what Disney should do is scrap the deal, go get Hulu. I think Hulu, long-term, is the prize in this acquisition. They already have a minority stake. The Fox deal would give them a majority stake. But, I feel like that's the potential over-the-top direct-to-consumer platform that Disney's been lacking. And I don't know why they're not seeing that -- at least, it doesn't seem like Bob Iger sees that. He sees, "Well, we have the ESPN app, next year we're going to have the Disney app." But I feel like Hulu could be that place. It's already very popular as a competitor to Netflix and Amazon. Why not make that your destination for all future Disney content? So, I would do that, and I would buy back a heck of a lot more stock, and I think investors should do fine.
Cross: I think that's a great point, Matt, too, with Hulu. They're continuing to invest in that business, and it's requiring lots of investment. It's funny, what kind of Disney is going to be the future of Disney for shareholders and for all the wonderful properties and for all the consumers who love Disney? Because they're kind of stuck in this, we have these areas that are really exciting, and then we have these areas that are kind of struggling, we have this potential to invest in things like 20th Century Fox or things like Hulu and BAMTech. Which kind of company are we trying to be? And, what's going to be the one that's going to drive long-term value? And Matt, I think that investment idea into things like Hulu and BAMTech, which is really interesting, but it's definitely going to take lots of investments in over-the-top properties. And I think investors are like, "What kind of company is Disney going to be over the next five years?"
Greer: Let's talk about that. We mentioned Hulu, and we know that Disney is making a big push into streaming. They're going to be unveiling their own streaming service. This is a question we've kicked around from time to time. But, if Disney's streaming service is a smash success, better than anyone could have imagined, do you think that comes at the expense of Netflix? Or, is there room for both?
Argersinger: I think there's absolutely room for both. I've said it before, I think on this show, I feel like there's a future where you've got your Amazon Prime, your Netflix, and then YouTube is probably a big platform as well. But, I think Disney is probably in that top band. But, again, I think the easier road --
Greer: Get Hulu.
Argersinger: -- is to go through Hulu. As a consumer, and maybe I'm not typical, but, I don't like all these apps. I kind of like things all in one place. Now, there's a CBS app, there's other apps that I can subscribe to, as well. I just feel like it has to be simplified. It has to be a platform that has a lot of things on it. And right now, Hulu is becoming that.
Cross: There are few brands that can pull that off the way Disney can. I think Matt's right. I think the Disney streaming property can fit completely with Netflix. Not everyone can claim that. Disney can.