North America

Earnings Preview: Walt Disney Q1 2017 (DIS)

By: Craig Bowles

Overview

Walt Disney Co. (DIS) is slated to report 1Q 2017 earnings after the bell on Tuesday, February 7th. The earnings release is expected at approximately 4:15 p.m. ET followed at 4:30 p.m. with a webcast presentation available through Disney Investor Relations. Disney’s Media Networks includes sports channel ESPN and ABC. Parks and Resorts include Walt Disney World Resort in Florida and the Disneyland Resort in California, as well as the Disney Cruise Line. Films are distributed under the Walt Disney Pictures, Pixar, Marvel, Touchstone and Lucasfilm banners. Disney’s Consumer Products segment publishes and sells products based on the company’s intellectual property — licensing characters from its films, TV shows and other creations to third parties. The media and entertainment giant is a member of the Dow Jones Industrial Average (DIA) and could therefore influence direction of the index futures and other broad market gauges.

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Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS) Excluding Items: The Street estimate is $1.49 (range $1.38 to $1.64). (Source: Yahoo! Finance) Consensus was $1.61 three months ago.
  • Revenues: Analysts expect an increase of 0.10% y/y to $15.26 bln (range $14.78 bln to $15.57 bln).
  • Price/Earnings of 19.1 compares to a 5-year average of 19.6; Price/Book 4.0 compares to a 5-year average of 3.1; Price/Sales 3.2 compares to a 5-year average of 2.9, Price/Cash Flow of 13.6 compares to a 5-year average of 15.6. Dividend yield of 1.4% compares to a 5-year average of 1.3%.
  • Analysts remain bullish on Disney with 20 (14 last qtr) Buy, 9 Hold, and 4 (2 last qtr) Sell ratings. (source: MarketBeat.com)
  • Insider sold a net 173,585 shares the last three months and a net 177,389 shares in the past year. (source: NASDAQ.com) Disney bought back $7.5 billion in stock in 2016 and is expected to buy back $6–$8 billion of its stock during fiscal 2017.
  • Disney is compared to other entertainment companies with quarterly results possibly impacting Viacom (VIA) and Time Warner (TWX).
  • Disney shares have a 1-day average price change on earnings of 3.91%. Options are pricing in an implied move of 3.61% off earnings.

Recent News

  • 01/27: Piper Jaffray raised their average annual growth expectations for Walt Disney by 100bps over the next four years based on analysis of the upcoming projects across Parks and Resorts, the future film slate at the Disney Studio and its impact on Consumer Products, according to a post on Barron’s.com.
  • 01/17: Goldman Sachs upgraded Disney to Buy from Neutral citing four key drivers: (1) DIS’s FY18 film slate might be its best ever; (2) ESPN headwinds may abate; (3) Major new park attractions start opening in CY17 through CY19. (4) DIS would potentially benefit the most in the peer group from corporate tax reform, according to a post on Barron’s.com.
  • 01/12: JPMorgan reiterated an Overweight rating on Disney although FQ1 is likely to be a light quarter due to certain timing shifts (Media Networks, Parks) and very difficult comparisons (Studio, CPIM). Disney’s underlying business trends continue to be healthy, according to a post on Barron’s.com.
  • 01/10: Credit Suisse reiterated an Outperform rating on Disney but is against a potential Disney-Netflix hookup, according to a post on Barron’s.com.
  • 12/01: Bernstein was initially skeptic about rumors of Disney potentially buying Netflix is now open to the idea. Disney could build for less than $70bn, but would still have to compete with Netflix forevermore, according to a post on Barron’s.com.

Technical Review

Disney’s stock had risen for four years without a correction to the August 4, 2015 all-time high at $122.08 and then fell 20% before the month was finished. After retesting the high in November 2015, the worry was a double-top formation. The relatively tame downside from 2015’s historically problematic Price/Sales ratio of 4x appears to have been muted by stock buybacks.  Point and figure technicians have a bullish price objective of $150. (Chart courtesy of StockCharts.com)

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Summary

While analysts don’t expect a great Q1 earnings report, Disney CEO Bob Iger said the causes of ESPN subscription losses had abated. Fiscal 2018 has Star Wars, Marvel, and Pixar films. Tax reform could see the rate drop from about 33% to 20%. Insider selling picked back up after taking nine months off, so hopefully has a seasonal reason for doing so. Increased buybacks have given support on pullbacks, so a new buyback announcement would be comforting. The company beat/missed earnings expectations by an average of 4c the past three quarters and the year-ago quarter beat by 18c when Star Wars was released. Estimize consensus for an EPS excluding items of $1.52 on revenue of $15.310 bln compares to analyst consensus of $1.49 on revenue of $15.26 bln.

 

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