Parks & Studios Will Drive Disney’s Top Line In Fiscal 2018

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Disney‘s (NYSE: DIS) earnings per share and revenues missed market expectations, despite solid gains in core segments, as it announced its fiscal third quarter earnings on Tuesday, August 7. The company’s revenue increased 7% year-over-year (y-o-y) to $15.2 billion and operating income grew 5% y-o-y to $5.2 billion. In addition, the company’s adjusted EPS rose 18% y-o-y while free cash flow fell 25% y-o-y to $2.6 billion.

On the $71 billion Disney – Fox deal, the company reported that the timing of the deal closing will depend on whether Fox acquires full ownership of Sky, as well as the amount of the proceeds from the regional sports network disposition. Disney will also be suspending buybacks of shares until there’s an improvement in its credit rating, due to the expected increase in leverage in order to fund the cash component of the deal.

Disney’s stock price has increased slightly over the course of 2018, primarily due to the focus on the company’s new online streaming media service and the acquisition of assets from Fox. Our $120 price estimate for Disney’s stock is slightly ahead of the current market price. We have created an interactive dashboard on what to expect from Disney’s Q4 earnings which outlines our forecasts for the company’s fiscal Q4 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation. We expect Disney to post an increase in earnings and revenue growth rate in Q4, driven by continued growth in company’s international operations of Parks & Resorts (with another operational year of the Shanghai Resort) as well as a healthy film slate.

Media Networks Could Be A Drag In Q4

Disney’s Media Networks revenue for the third quarter grew 5% y-o-y to $6.1 billion, driven by growth in affiliate revenue, offset by a decrease in advertising revenues. The segment’s operating income declined 1% y-o-y, as higher results at Broadcasting were offset by a decline at Cable and lower equity income. At Cable, operating income was lower in the quarter, as higher results at ESPN were more than offset by a loss at BAMTech – reflecting higher content and marketing costs and ongoing investment in its technology platform, including costs associated with ESPN+. This trend could likely continue in this Q4 as well. Going forward, Disney expects BAMTech’s results to have an adverse impact on Media Networks’ fiscal 2018 operating income of $180 million compared to the prior year. This is $50 million worse than its previous estimates, primarily due to increased investment in ESPN+.

Expect Relatively Strong Studio Performance In Q4

The studio benefited from the release of Avengers: Infinity War during the quarter, which collected more than $2 billion at the global box office. In the upcoming quarter, we expect the studios to benefit from the release of Ant-Man and the Wasp and Incredibles:2. We expect a relatively strong fourth quarter for the company with respect to its Studio Operations and Consumer Products segment, as Ant-Man and the Wasp has already collected $200 million at the domestic box office as of August 6, which is more than the entire studio collection for Q4 last year.

Parks And Resorts To Boost Results In Long Run

Disney continues to make enhancements to its parks with the recent opening of the new Toy Story Land at the Shanghai Disneyland. The company also plans to open a new Star Wars Land in 2019 at both the Disneyland and Walt Disney World locations. Overall, we expect Disney’s theme parks to be an important driver for its long-term growth due to its international expansion. In the first nine months of fiscal 2018, the segment’s revenues grew 11% y-o-y and operating income increased 20% y-o-y.

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