Disney (DIS) Q4 Earnings Miss; Stock Up On Optimistic View

Media behemoth – The Walt Disney Company (NYSE:DIS) – reported weaker-than-expected earnings and revenues in fourth-quarter fiscal 2016 after beating estimates in the previous quarter. The company’s earnings in the reported quarter came in at $1.10 per share, missing the Zacks Consensus Estimate of $1.15 and declining 8.3% year over year.

Revenues declined 3% year over year to $13,142 million and missed the Zacks Consensus Estimate of $13,469 million. The results in the quarter were negatively affected by dismal performance of Media Networks and Consumer Products as well as Interactive Media.

Despite dismal quarterly performance, the company’s shares increased 2.5% in after-hour trading session on Nov 10, following Chief Executive Robert Iger’s optimistic view on the company’s future. He is bullish on ESPN’s future, which has come under a lot of pressure as the Pay TV landscape continues to alter owing to the migration of subscribers to online TV. Further, it anticipates reporting modest earnings growth in fiscal 2017 but a "more robust growth" in fiscal 2018.

The company has an impressive lineup of movies in fiscal 2018. The company is expected to release four new Marvel movies, two Star Wars movies, which includes Episode VIII and three animated films from Pixar and Disney Animation. Moreover, the success of its movies will mean great business for its Consumer Products division as demand for merchandise associated with successful movies usually skyrockets.

Falling subscriber base and higher programming costs of these businesses have been worrying investors for quite some time now. Subscribers of ESPN declined in the reported quarter too. Most of the media companies are failing to cope with "cord cutting" as consumers do not want to pay for large bundles of channels. Disney is striving to bring back ESPN’s golden days. In an effort to attract online viewers, it has inked a deal with video streaming, data analytics as well as commerce management company BAMTech. Addititionally, it has the option to acquire the majority of the stake in BAMTech in the future. Disney intends to come up with a fresh “direct-to-consumer ESPN-branded, multi-sports subscription streaming service.”

Coming back to the results, the company’s total operating income came in at $3,176 million during the quarter, down 10% year over year. The downside was primarily due to 8% and 28% fall in operating income at Media Networks and Studio Entertainment, respectively.

Segment Details

The Media Networks segment’s revenues decreased 3% to $5,658 million, primarily due to a 7% decline in Cable Networks revenues to $3,956 million. However, Broadcasting revenues increased 8% to $1,702 million.

The segment’s operating income came in at $1,672 million, down 8% year over year. Cable Networks saw a 13% drop in operating profits to $1,448 million, whereas the Broadcasting segment reported a 37% jump in operating profit to $224 million. The sharp decline in Cable Networks operating income can primarily be attributed to dismal performance of ESPN and Disney Channels. Weaker results at ESPN were mostly due to a fall in advertising and affiliate revenues in comparison to the preceding year. ESPN advertising revenues declined 13% in the reported quarter owing to substantial decline in daily fantasy advertising, diversion of ad revenues toward Olympics programming and an extra week of ad revenues in the prior-year quarter. Further, ESPN results were marred by an increase in programming and production cost increased.

The decline in affiliate revenue and program sales hampered results at the Disney Channels.

Parks and Resorts revenues came in at $4,386 million, up 1% from the year-ago period. The segment’s operating income decreased 5% to $699 million. While domestic operations were robust, international operations were hampered by lower footfall and dismal performance of Disneyland Paris and Hong Kong Disneyland Resort. Increase in operating income at the company’s domestic operations was driven by growth at Walt Disney World Resort due to a rise in guest spending and a decline in costs, marginally overshadowed by lower volumes.

The Studio segment generated revenues of $1,811 million, up 2% year over year. On the other hand, operating income dropped 28% to $381 million. The decrease in operating income was mainly due to a decline in theatrical distribution results, which somewhat neutralized the growth registered at TV/SVOD distribution. Dismal theatrical distribution results were chiefly due to poor performance of Pete’s Dragon and Queen of Katwe.

Consumer Products & Interactive Media division saw a 17% decrease in revenues to $1,287 million. The unit's operating income went down 5% to $424 million. The fall in operating income mainly stemmed from a decline at the company’s merchandise licensing and gamer business.

Other Financial Details

Disney, which shares space with Twenty-First Century Fox, Inc. (NASDAQ:FOXA) , generated free cash flow of $2,745 million during the quarter, up 29% year over year. The company ended the quarter with cash and cash equivalents of $4,610 million, borrowings of $16,483 million and shareholder’s equity of $47,323 million, excluding non-controlling interest of $4,058 million.

During the quarter, the company bought back 16.6 million shares for $1.6 billion.

Zacks Rank & Stocks to Consider

Currently, Disney carries a Zacks Rank #3 (Hold). Better-ranked stocks include The Liberty Media (NASDAQ:LMCA) Group (NASDAQ:LMCK) , sporting a Zacks Rank #1 (Strong Buy) and NTN Buzztime Inc. (NYSE:NTN) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Liberty Media Group shares have increased 51% over the past six months.

NTN Buzztime has a long-term earnings growth rate of 20% and its shares have increased more than 38% in the past three months.

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