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3 Key Areas to Watch When Walt Disney Co Reports Earnings on Tuesday

By Beth McKenna – Feb 5, 2016 at 4:01AM

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On the heels of the release of the phenomenally successful "Star Wars: The Force Awakens,” investors are hoping for powerful earnings when the entertainment giant reports its fiscal first-quarter 2016 results.

Walt Disney Co.(DIS -1.83%) will report its fiscal 2016 first quarter results after the market close on Feb. 9.

The diversified entertainment giant is going into its report on a mixed note. On the positive side, these results come on the heels of the phenomenally successful Star Wars: The Force Awakens release. Disney also capped off a robust fiscal 2015 (which ended in October) by posting expanding operating and profit margins last quarter. The market, however, remains concerned that "cord-cutting" -- subscribers dropping or trimming their large cable bundles -- could affect the future profitability of the company's media networks.

While this concern has whipsawed Disney shares since last August, they still returned a solid 12.9% in 2015. That compares very favorably to the S&P 500's 1.4% total return.

Source: Disney

By the numbers
Disney doesn't provide earnings guidance, and long-term investors shouldn't pay too much attention to analysts' quarterly earnings estimates, since Wall Street is notoriously short-term oriented. As long as key metrics generally keep moving in the right direction, the company's stock should continue to delight.

It's worth noting, however, that the House of Mouse beat earnings expectations in every quarter of fiscal 2015.

Here's what to watch in the upcoming report.

Media networks: margins and comments about cord-cutting
The market will once again be focused on Disney's media networks, its largest and most profitable segment, and particularly on its crown jewel, ESPN. While the sports cable network remains incredibly successful, its subscriber count is declining due to people ditching or slimming down their large cable packages. At the same time, the costs of securing broadcast rights to live sporting events have been increasing. So, while its margins are still enviable -- and they actually expanded last quarter -- they're under some pressure.

Disney released its ESPN subscriber numbers in an SEC filing the day before Thanksgiving, revealing they fell from 99 million at the end of fiscal 2013 to 92 million at the end of fiscal 2015. That's an annual subscriber loss of about 3.6%.

These cord-cutting concerns and their effect on profitability are legitimate. After all, media networks accounted for 44% of Disney revenue and a whopping 53% of its operating income in fiscal 2015. However, it's possible the market is underestimating Disney's ability to overcome this challenge or compensate for it. This company is masterful at leveraging its intellectual property, which oftentimes results in unexpected new income sources. Additionally, Disney has significant known catalysts for growth on the horizon, some of which could turn out to be more powerful than anticipated.

The Force Awakens flies into the financials

Source: Disney

This will be the first quarter that The Force Awakens enters Disney's financials, with what should be a bang for both the studio entertainment and consumer products segments.

The Star Wars film, which opened in the U.S. on Dec. 18, continues to shatter box office records. Just 20 days after its release, it captured the crown for the highest grossing film of all-time (excluding inflation) at the domestic box office, surpassing Avatar's $760.50 million. Worldwide, the film has generated $1.94 billion, as of Jan. 25.

Investors should also expect a huge jump in consumer products results. Star Wars merchandise flew off retailers' shelves over the holiday season. Hasbro's (HAS 0.82%) movie-based action figures and select toys were among the best-selling items on Black Friday and Cyber Monday, according to retailers and industry trackers. 

Additionally, Disney CFO Christine McCarthy explained on last quarter's conference call that the company can't recognize the licensing revenue of film-based merchandise until the film is released due to accounting rules. As a result, licensing revenue generated in Disney's previous quarter from the sales of Star Wars merchandise will also be included in this quarter's results. So, for instance, Disney will recognize this quarter its cut from nearly a month of Hasbro toy sales from the fiscal 2015 fourth quarter, since Hasbro rolled out its initial line of movie-based toys to retailers on Sept. 4. 

Star Wars mania is far from over, as two more films to complete the trilogy that began with The Force Awakens are scheduled to be released in December 2017 and sometime in 2019. Additionally, two standalone spin-off films are slated to hit the silver screen within the next few years -- the first, Rogue One, is scheduled to debut in December 2016.

Parks and resorts: margins and outlook for Shanghai Disneyland
Momentum is strong in parks and resorts, Disney's second largest segment by revenue. Domestic theme parks continued to draw record crowds throughout 2015, while park visitors, on average, continued to shell out more money.

And there's a huge catalyst for growth on the near-team horizon: Shanghai Disneyland. The massive new Chinese park is scheduled to open on June 16, with some analysts expecting it to draw up to 25 million visitors during its first full year -- a number that would dwarf the Magic Kingdom in Orlando.

Disney considers this project a long-term bet on China. CEO Bob Iger has been quoted several times as saying that the company is not concerned that the park is opening at a time when China's economic growth has slowed to a 25-year low.  While growth has slowed, it was still 6.9% last year,  and China's middle class is ballooning, which bodes well for the park's success.

Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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