Digging Into Disney's Financials

Check out the latest Disney earnings call transcript.

Walt Disney (DIS -0.76%) has set itself up to have a hit-filled slate of box office releases, but that can lead to unpredictable financials. A misstep like Solo might cause the company to lose revenue in theme parks and consumer products.

On the other hand, a surprise megahit like Frozen can see it struggle to meet demand for products, spin-offs, and theme park attractions. Those things, coupled with uncertainty around ESPN and Disney's streaming services, have been a drag on the company's stock.

In this segment from Industry Focus, host Dylan Lewis and Fool.com contributor Daniel Kline discuss the entertainment giant.

A full transcript follows the video.

This video was recorded on Jan. 22, 2019.

Dylan Lewis: Also, being plagued with some issues related to cord-cutting, you look at the company's financials over the last year or so and going back into 2017, they were flat in fiscal 2017. They returned to growth in 2018. Eight percent revenue growth. Forty percent bottom-line growth, which is pretty incredible. I think they benefited a bit from some of the timing of releases. They were really crushed in 2017 by their release calendar.

Dan Kline: Yeah, fiscal 2017 did not have an Avengers movie. The Star Wars movie was the end of the year, so that put it into fiscal 2018. It had Coco, which was a surprise hit, Thor: Ragnarok, which did better than the other Thor movies, but is still just middling -- which is ridiculous to say. Any other company would be thrilled to have a $500 million global box office success. But by Disney standards, they didn't have their billion-dollar standards. And when you have a surprise -- like Moana, the level of hit that Moana was a surprise. That means that when you go to stores -- and we saw this with Frozen when it came out. Nobody knew Frozen was going to be a phenomenon. You couldn't go to Target and buy a Frozen backpack. They sold out in eight seconds. I had friends who were combing the earth or making their own. A year later, that wasn't an issue. They knew that demand.

So, when you have an off year with box office, maybe the things you've lined up, the big deals, don't do as well in the other channels. And it's a ripple effect. Nobody wanted to go to Disney World to do a meet and greet with young Chewbacca from Solo, or whatever. I didn't see Solo. I've read every Star Wars book and seen every movie, except the books about Solo and the movie just didn't have any appeal, and I am the core audience.

Lewis: I know that my girlfriend, who's a big Star Wars fan, loved Solo, because her ultimate fan crush is Harrison Ford as Solo. So, it met that audience very well. She was very happy with the movie. But, I think you're right, the timing of some of those releases made it tricky, and also the level of hit factor that they were made it a little tricky with their financials.

We look now, they just closed out fiscal 2018 back in the fall. I mentioned 8% revenue growth. The EPS numbers are looking pretty good, too. And yet, we're seeing Disney now trading at the lowest valuation that it's seen in the past couple of years. I think right now, shares are around 13.5 times trailing earnings.

Kline: There's uncertainty in a number of areas. The Fox purchase, $20 billion or something, could be a drag. They brought back a lot of intellectual property that will eventually work, but it's going to take them a while. How does Disney put out a Deadpool movie? [laughs] That's not a classic Disney release. Can Disney do something like the Logan movie, which was one of the later X-Men sequels that was very, very dark and doesn't feel like Disney at all? I think they'll figure out how to make those movies and then make them theme park rides when they have the rights, but there's a lot of questions about that.

The other big question is ESPN+. This is the one area, if I'm going to question what Disney's doing -- when they launch Disney+, they're going to launch it with Star Wars shows, Marvel shows, Disney Kids properties, Mickey Mouse. It's a no-brainer. I will pay for that right now in advance. ESPN+ is spending huge money, $200 million a year, to UFC for things that 600,000 people watched when they were on FS1 for free. I question building a service around stuff not good enough to air on ESPN.

Lewis: Do you think that some of that, though, is people looking out and saying, "All right, professional sports contracts are getting outrageous. It's becoming so expensive to be the source for all of the main leagues. We need to appeal to the niches that we know exist." WWE is the perfect example of a company that, it doesn't make any sense to me as a niche, but it's built an empire on a very specific audience.

Kline: We're taping this in advance. The day we tape this, I did a MarketFoolery with Chris Hill, and we talked about exactly this topic. WWE brings an audience. WWE to Fox, where they're paying $1 billion over five years for SmackDown Live, will do 1.8 to 2.2 million people. Maybe it'll tick up, maybe it'll tick down. If they get a character that's hot, maybe it can get to three million. It's not going to bottom out. That is a sure thing. When you're taking Top Rank boxing and giving them hundreds of millions of dollars with only a few stars, people have actually so far proven more willing to spend $60 on a pay-per-view than $6 a month. It's been a problem for the WWE Network. They said, "OK, Dylan's not a wrestling fan, but he loved Hulk Hogan." I know you did.

Lewis: [laughs] I'll play along.

Kline: "And he buys WrestleMania every year and one other pay-per-view. He's spending $150 for this every year. Why wouldn't he spend $9.99 a month?" Because it's an impulse buy. That's where I think, maybe they'll figure out enough niche sports that I say, "Ooh, because I want to watch that boxing fight, I will happily watch the other shows they're producing. It's worth it to me." For me, I have every other streaming service, almost literally every other streaming service. Nothing ESPN+ has showed me -- like, I'd love to watch Katie Nolan's show. I think she's a great performer. I'm not paying $6.99 or $5.99 or whatever the number is, it depends how long you subscribe for. That's the one I question.

But, remember, this isn't ESPN. This is the add-on. If they start giving me ESPN and make it $9.99 a month, that's part of why I have Sling TV, is access to ESPN. They're protecting their cable business by not doing that. Someday, they won't do that.