Wall Street Encouraged By Disney's Theme Park Growth, 'Avengers' Success

Walt Disney Co DIS reported a second-quarter bottom line that beat consensus estimates but declined 12 percent from the previous year.

“GAAP earnings were impacted by a number of significant items, including a gain on Hulu, severance costs, and the amortization of both acquired intangibles and stepped up Film and TV inventory,” Morgan Stanley analysts wrote in a note.

Fox Forward

Disney will accelerate its integration of Fox assets, and Morgan Stanley sees space for deleveraging.

“Specifically, we are focused on Hulu, the developing of the Fox theatrical slate, FX production plans, and the capture of cost synergies over the next two years,” analyst Benjamin Swinburne wrote. “Fox will be dilutive in F3Q, the first full quarter, as Disney has yet to capture material cost synergies and pay down the incremental debt from the transaction.”

OTT Streaming Prospects

“Avengers: Endgame” is on pace to become the second-highest grossing movie ever, and Tigress Financial analyst Ivan Feinseth expects it to drive significant subscriber growth for Disney+ when it eventually joins the streaming service.

“I further believe both Star Wars and Marvel franchises including a number of series from both these franchises will be significant drivers for Disney+ subscriptions,” Feinseth wrote. “I believe that Disney+ will be a significant revenue driving opportunity along with the ongoing success of Disney Studios and Theme Parks.”

As expected, Disney lost about $400 million in the direct-to-consumer investment this quarter. Management guides for a $460 million loss in the current period as it consolidates Hulu.

“We expect Disney+ losses will continue to grow as we approach the service launch in November,” UBS analyst John Hodulik wrote.

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Mixed Segment Results

Bank of America Merrill Lynch praised strength in media network operating income.

But Morgan Stanley considered the segment results “soft.” Affiliate revenue growth fell short of forecasts, and subscription rates deteriorated for cable networks. ESPN exceeded ad expectations, but ABC underperformed.

The media results were offset by theme park, consumer product and studio revenue. The parks and experiences segment saw 15-percent growth in operating income despite a $45 million to $65 million headwind from the Easter timing.

“We expect continued momentum in the US parks due to 1) F3Q will benefit [from the] timing of Easter; 2) Star Wars: Galaxy's Edge set to launch in CA later this month and FL in August (largest expansion in Disney history, reservations for CA already sold out); and 3) price increases enacted in F2Q were greater than historical average,” Hodulik wrote.

The Ratings

Tigress Financial sees significant upside to the stock and recommends purchase. So do peers:

• Bank of America Merrill Lynch maintained a Buy rating with a $168 target;
• Morgan Stanley maintained an Overweight rating with a $135 target; and
• UBS maintained a Buy rating with a $165 target.

Disney's stock traded around $134.20 per share at time of publication.

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