What To Expect From Disney’s Q2

Disney (NYSE: DIS) is scheduled to announce its fiscal second quarter results on Tuesday, May 8. The company had a fairly soft fiscal 2017 (fiscal year ends September 2017), as total revenue declined 1% year-over-year (y-o-y) to $55 billion, primarily due to a fall in Studio revenues, weakness in the Consumer Products segment, and a continued decline in the Media Networks segment. However, the company reported relatively mixed fiscal first quarter earnings in February, as its EPS came in ahead of market expectations but revenues missed. The company’s revenue grew 4% y-o-y to $15.3 billion, primarily due to a continued strong performance in Parks and Resorts segment, partially offset by fairly flat results in other segments. The company posted diluted GAAP earnings of $2.91 per share, up a strong 88% y-o-y, largely driven by the lower federal tax rate in fiscal 2018. Excluding this benefit, the earnings rose 22% y-o-y to $1.89.

Going forward, we expect the continued growth in company’s international operations of Parks & Resorts (with another operational year of the Shanghai Resort) to positively benefit Disney’s revenue and EPS in Q2. We have created an Interactive Dashboard which outlines our forecasts for the company and our expectations for its Q2 earnings. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Media Networks Could Remain Flat In Q2

Disney’s Media Networks revenue for the first quarter remained flat at $6.2 billion, while its segment operating income decreased 12% y-o-y to $1.2 billion, primarily due to lower broadcasting results and lower equity income. The flat Media Networks results were driven by growth in affiliate revenue, offset by a decrease in advertising revenues. The company was largely impacted by higher programming expenses at ESPN due to the first year of the new NBA contract and ESPN’s falling prime-time viewership. This trend seems likely to have continued in this quarter as well. ESPN’s average all-day household viewership declined 17% y-o-y, while this metric declined 25% y-o-y in the 8 pm to 11 pm time slot, in the March quarter.

Relatively Mild Studio Performance In Q2

The studio benefited from the release of Black Panther during the quarter, which collected nearly $693 million at the domestic box office. However, we expect a fairly soft second quarter for the company with respect to its Studio Operations and Consumer Products segment, largely due to difficult comps to key titles in the prior year, including Beauty and the Beast, and Rogue One: A Star Wars Story. 

Future Outlook

In fiscal 2018, Disney expects a $1 billion increase in its capital expenditures due to the continued investment in Parks and Resorts. In Studio Operations, the company plans to release movies such as the new Star Wars film (Han Solo) and Ant-Man and the Wasp in fiscal 2018. Disney is already benefitting from the release of one of its major franchise films, Avengers: Infinity War, which has collected almost $1 billion at the global box office since its opening on April 27. This blockbuster film lineup should help the company lift its Studio and Consumer Products revenues going forward. In addition, we also expect Disney to benefit from ESPN’s streaming service ESPN+ in the long run.

Our $111 price estimate for Disney’ stock is around 10% ahead of the current market price.

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