What To Expect From Disney’s Q4 2016 Earnings?

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Disney (NYSE: DIS) is scheduled to announce its fiscal fourth quarter results on Thursday, November 10. The company announced strong results in third quarter, with both revenue and earnings per share beating market expectations. In Q3 2016, the company’s revenue came in at $14.2 billion, up 9% from a year ago while its operating income of $4.5 billion was up 8% year-over-year (y-o-y). Its diluted earnings per share (EPS) grew by 10% y-o-y to $1.59, and continued with its growth trend. Disney’s studio entertainment revenues for the quarter increased by a robust 40% y-o-y due to growth in its theatrical and home entertainment distribution results, led by strong performances of Captain America: Civil War, The Jungle Book, Finding Dory and Zootopia.

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Although the company’s studio segment has generated $2.3 billion in operating income during the first three quarters of fiscal 2016 already, surpassing the full year results of fiscal 2015; we expect the company’s studio performance to remain subdued in the fourth quarter as there weren’t as many big releases as compared to Q4 2015. Going forward, we also expect the company to post steady growth at its theme parks in the fourth quarter. However, we expect ESPN to face continued headwinds amid lower television ratings since its ratings declined 10% y-o-y for prime time and 6% y-o-y in total day for the September quarter [1]. Moreover, ABC’s C3 average for premiere week was down 26% from the comparable week in 2015 [2]. Additionally, Disney’s broadcasting revenue declined in the previous quarter due to lower network advertising revenue and higher programming costs. We expect this trend to continue in the fourth quarter as well.

ESPN To See Continued Subscriber Losses

ESPN accounts for more than 25% of Disney’s valuation, according to our estimates. The network has been struggling with subscriber declines of late due to the emergence of alternative viewing platforms, and has lost more than 11 million subscribers over the past six years. The network has spent a significant sum for the right to broadcast NFL, MLB and NBA games, with the hope that it could boost ratings and stem the subscriber declines. However, the NFL has been seeing consistent declines in viewership this season.

As the network struggles with subscriber losses, it will need to boost advertising revenues to offset the consequent loss in subscription revenues. However, with ratings declining, it may not be able to consistently increase its ad pricing. Therefore, weak ratings could have a long term impact on ESPN’s advertising revenue as well.

         

Theme Parks And Resorts To Boosts Results In Near Term

Disney witnessed higher per capita spending on admissions, food and beverage in its theme park business in the third quarter, despite the shifting of Easter to Q2 this year and the alligator attack at one of the Disney theme parks.

We believe that theme parks, which currently account for 30% of the valuation of the company per our estimates, could be an important driver for Disney’s long term growth. The launch of Disney’s Shanghai theme park has been a success, as the park demonstrated 95% occupancy last quarter and more than 1 million guests during its first month. Moreover, Disney’s Cruise Line is also gaining momentum with two additional cruise ships expected to join its fleet by 2023.

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In Q4 2016, Reuters’ compiled analyst estimates forecast revenues of $13.5 billion and earnings of $1.16 per share.

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Please refer to our complete analysis for Disney

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Notes:
  1. TV Ad Spending Fell 5.8% in September, broadcastingcable.com, Oct 2016 []
  2. Premiere Week C3 Ratings: The Numbers That Matter Most to the Networks, variety.com, Oct 2016 []