North America

Earnings Preview: Walt Disney Q2 2017 (DIS)

By: Craig Bowles

Overview

Walt Disney Co. (DIS) is slated to report 2Q 2017 earnings after the bell on Tuesday, May 9th. 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 $1.41 (range $1.33 to $1.56). (Source: Yahoo! Finance) Consensus was $1.43 three months ago.
  • Revenues: Analysts expect an increase of 3.70% y/y to $13.45 bln (range $13.13 bln to $13.69 bln).
  • Price/Earnings of 20.0 compares to a 5-year average of 19.6; Price/Book 4.1 compares to a 5-year average of 3.1; Price/Sales 3.3 compares to a 5-year average of 2.9, Price/Cash Flow of 15.0 compares to a 5-year average of 15.6. Dividend yield of 1.3% compares to a 5-year average of 1.3%.
  • Analysts remain bullish on Disney with 17 Buy, 11 Hold, and 4 Sell ratings. (source: MarketBeat.com)
  • Insider bought a net 1,588 shares the last three months but sold a net 261,299 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 2.95%. Options are pricing in an implied move of 3.17% off earnings.

Recent News

  • 05/04: S&P Global Ratings raised its long-term corporate credit rating on Walt Disney to A-plus from A citing a deep reservoir of intellectual property to generate high demand content through its film and television studios, according to a post on Barron’s.com.
  • 05/03: Macquarie’s note on Walt Disney’s ESPN argues that big journalist layoffs at ESPN shows a shift to be more entertainment and less news that could pay dividends for the television network, according to a post on Barron’s.com.
  • 04/26: Cowen raised Disney earnings estimates citing the success of Beauty and the Beast and the upcoming launch of Guardians of the Galaxy 2 on May 5 but remains concerned that Disney is earning an unsustainable portion of film industry profits (~60% of the total CY 2016), at a time when industry profits are under pressure (down -15% y/y in 2016), according to a post on Barron’s.com.
  • 04/11: Goldman Sachs reiterated a Buy rating on Disney and added it to their Conviction List on the belief that the market isn’t giving Disney enough credit for its potential growth acceleration, according to a post on Barron’s.com.
  • 03/20: Piper Jaffray reiterated and Overweight rating on Disney citing that Beauty and the Beast is on track to cross $1B worldwide after a ~$350M opening weekend, 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 and having a similarly sized pullback, it’s understandable that investors are a little nervous after nearing that resistance area recently. The relatively tame downside from 2015’s historically problematic Price/Sales ratio of 4x appears to have been muted so far by stock buybacks. (Chart courtesy of StockCharts.com)

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Summary

Disney’s Beauty and Beast film was a huge success and expectations are high for Guardians of the Galaxy 2.  ESPN’s reorg is applauded by analysts. Fiscal 2018 has Star Wars, Marvel, and Pixar films. Tax reform could see the rate drop from about 33% to 20%. Insiders bought some shares. 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 four quarters. Estimize consensus for an EPS excluding items of $1.45 on revenue of $13.522 bln compares to analyst consensus of $1.41 on revenue of $13.45 bln.

 

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