- Reports Tuesday, May 8, after the close
- Revenue Expectation: $14.11B, EPS: $1.7
When Walt Disney Co. (NYSE:DIS) reports Q2 2018 earnings later today, don’t expect a huge surprise. However, if you focus on the company's longer-term future, there are a number of reasons to get excited about this global entertainment giant, which has been building a war chest, arming itself to take on its rivals.
Disney’s biggest revenue-generating unit, media and networks—which includes television and the ESPN sports network—has been going through a rough patch. It lost viewers and advertising dollars to internet disruptors such as Netflix (NASDAQ:NFLX). Chief Executive Officer Bob Iger is addressing these challenges with some bold moves, including his plans for new online services and a $52.4 billion deal, announced in December, to buy much of 21st Century Fox Inc. (NASDAQ:FOX).
There might be a spanner in the works, though. Earlier today, Reuters reported that Comcast (NASDAQ:CMCSA) is considering a hostile play to break up the deal and has lined up around $60 billion in financing, in order to make an all-cash offer for Fox's assets. According to the Wall Street Journal, "Comcast hasn't yet decided whether to proceed with the hostile bid."
This new development notwithstanding, Disney will likely stay the course on addressing its challenges—and its competition. Last month, ESPN launched a subscription-based streaming service ESPN+, Disney’s first big push into the digital arena since it took a majority stake in technology company BAMtech last year. The service, which costs $4.99 per month, features thousands of live games, on-demand sports content and some exclusive content, designed to augment its struggling ESPN network.
Though Comcast's latest move could weigh on Disney shares in the near term, any positive surprise on the subscriber or advertising fronts should be good enough to fuel some gains in Disney's stock, which yesterday closed at $102.48. The price has been rising ahead of today's earnings report, after falling as much as 8% this year. Investors will be keenly watching the number of subscribers that have signed up for this latest addition to the company's growing streaming family.
No Major Turnaround...Yet
Nevertheless, we think it’s still too early to expect a significant reversal at Disney’s media networks unit, which has been a major drag on its share price. Less than a decade ago, ESPN was available in about 99 million homes in the U.S., but that number has fallen to about 87 million homes, according to Nielsen data.
Despite the declining audience, this business remains the House of Mouse's major breadwinner. It accounts for about half of the company’s operating revenue. In the last quarter, operating income from this business declined by 12%, to $1.2 billion—its seventh consecutive quarterly drop.
However, there are also some very bright spots on the short-term horizon: Disney's Marvel and Star Wars franchises have been producing robust sales results. The latest data show Disney's “Avengers: Infinity War” film, released in the US on April 23rd, crushed sales expectations during the past two weeks, topping $1 billion in global ticket sales, while “Solo: A Star Wars Story,” scheduled for release at the end of May, is expected to have an opening weekend of $160-$170 million.
Bottom Line
During the past few quarters, Disney has been successful in beating analysts’ expectations. It might very well do the same today.
Still, we don’t think this report will be enough to break the sluggishness cycle for Disney stock. We think Disney needs an early, and now successful conclusion to its Fox deal. If the acquisition goes through, it will be a major driver of future growth for the entertainment heavyweight, supporting the company's foray into online streaming business in a big way.