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Why Is Disney (DIS) Up 29.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Walt Disney (DIS). Shares have added about 29.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Disney due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Disney Reports Loss in Q4 on Y/Y Decline in Revenues

The Walt Disney reported adjusted loss of 20 cents per share in fourth-quarter fiscal 2020, beating the Zacks Consensus Estimate by 70.6%. The company had reported earnings of $1.07 per share in the year-ago quarter.

Revenues decreased 23.1% from the year-ago quarter to $14.71 billion but comfortably surpassed the consensus mark by 2.6%.

The coronavirus pandemic affected Disney’s segmental operating income by $3.1 billion.

Segment Details

Media Networks’ (49% of revenues) revenues grew 10.8% year over year to $7.21 billion. Revenues from Cable Networks increased 11% to $4.72 billion. Moreover, Broadcasting revenues were up 10% year over year to $2.49 billion.

Media Networks’ segmental operating income climbed 5% year over year to $1.86 billion. COVID-19’s impact on profitability was roughly $500 million.

Cable Networks’ operating income declined 7% to $1.16 billion. However, broadcasting operating income soared 47% to $553 million.

Cable Networks’ operating income decline was primarily attributed to weak ESPN performance, which suffered from higher programming and production costs.

Broadcasting operating income benefited from higher affiliate revenues and lower network programming and production costs as well as marketing expenses.

Parks, Experiences and Products segments revenues (17.5% of revenues) decreased 61.2% year over year to $2.58 billion. Operating loss was $1.10 billion against the year-ago quarter’s operating income of $1.38 billion.

Disneyland Resort and cruise line business remained closed in the reported quarter. The companies re-opened parks and resorts operated at a lower capacity, thereby negatively impacting overall performance.

Disney estimates that the coronavirus pandemic has hurt segmental operating income by $2.4 billion.

Studio Entertainment segment (10.8% of revenues) revenues decreased 51.8% to $1.60 billion. Operating income fell 61% to $419 million.

Theatrical distribution was hampered by coronavirus as theaters remained closed domestically and internationally. No significant title was released in the quarter under review.

Direct-to-Consumer (DTC) & International segment’s (33% of revenues) revenues came in at $4.85 billion, up 40.8% year over year.

ESPN+ had 10.3 million paid subscribers at the end of fiscal fourth quarter compared with 3.5 million at the end of the year-ago quarter.

Disney+, as of Oct 3, had 73.7 million paid subscribers, reflecting strong growth since its launch in November 2019. The company added more than 16 million users sequentially.

The rapidly growing subscriber base strengthens Disney’s position in the increasingly saturated streaming space currently dominated by Netflix. Launch of new services from Apple, Comcast and AT&T has further intensified competition.

Hulu ended the quarter with 36.6 million paid subscribers, up 28% year over year.

The average monthly revenue per paid subscriber for ESPN+ declined 12% year over year to $4.54 due to a shift in the mix of subscribers to Disney’s bundled offering and lower per-subscriber advertising revenue.

Notably, in November 2019, the company began offering a bundled subscription package of Disney+, ESPN+ and Hulu, which has a lower average retail price per service compared to the average retail price of each service on a standalone basis.

The average monthly revenue per paid subscriber for Disney+ was $4.52. Moreover, the average monthly revenue per paid subscriber for Disney’s Hulu SVOD-only service slipped 1% year over year to $12.59 due to lower per-subscriber advertising revenue and bundled subscription package.

The average monthly revenue per paid subscriber for Disney’s Hulu Live TV + SVOD service rose 22% from the year-ago quarter to $71.90 owing to higher retail pricing and Live TV per-subscriber advertising revenues.

Operating loss narrowed to $580 million from $751 million reported in the year-ago quarter. Cost associated with Disney+ hurt profitability, partially offset by better results at Hulu and ESPN+.

Other Quarterly Details

Costs & expenses declined 10% year over year to $15.16 billion in the reported quarter.

Segmental operating income decreased 82.3% year over year to $606 million.

Moreover, Disney recorded charges totaling $393 million in the reported quarter due to severance costs.

Additionally, Disney recognized a non-cash gain of $591 million to adjust its investment in DraftKings.

Further, interest expenses increased 12% year over year to $464 million due to higher average debt balances.

Balance Sheet

As of Oct 3, 2020, cash and cash equivalents were $17.91 billion compared with $23.12 billion as of Jun 27, 2020.

Total borrowings were $58.63 billion as of Oct 3, 2020 compared with $64.42 billion as of Jun 27, 2020.

Outlook

Disney expects continued negative impact from the coronavirus pandemic in fiscal 2021.

For the first quarter of fiscal 2021, the company currently expects COVID-19 to hurt its Parks and Experiences business.

Disneyland Resort is expected to remain close at least through the end of fiscal first quarter. Disneyland Paris is also currently closed.

Lack of any significant theatrical release will also hurt Studio Entertainment results. Moreover, home entertainment, stage play and studio TV SVOD results are anticipated to decline year over year.

Additionally, higher rights and production costs due to the shift of four NBA finals games and three additional college football playoff games into the fiscal first quarter 2021 will hurt ESPN’s results.

Operating results at DTC and international channels businesses are expected to decline by roughly $100 million and $300 million, respectively.

Capital expenditure for fiscal 2021 is expected to be $500 million higher than roughly $4 billion spent in fiscal 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -243.36% due to these changes.

VGM Scores

At this time, Disney has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Disney has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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