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Disney Earnings Preview: Will Fox Deal Distract From Everything Else?

Disney Earnings Preview: Will Fox Deal Distract From Everything Else?

Walt Disney Co (NYSE: DIS) reports first-quarter earnings for fiscal 2018 after the close on Tuesday, Feb. 6. While the big focus among analysts for a while now has been subscriber losses at ESPN, some other recent news might steal the show this quarter.

During the first quarter of fiscal 2018, DIS announced plans to acquire TV and entertainment assets from Twenty-First Century Fox Inc. (NASDAQ: FOXA). With the $52.4 billion proposed acquisition, DIS would add 20th Century Fox’s TV studio and film division, as well as cable TV and international businesses, to its portfolio.

That news came not too long after the company’s announcement that it would be launching two new video-streaming services, the first one slated to debut in 2018 and the second in 2019. Between the two announcements, analysts are likely to be digging in for more details from DIS management. So, needless to say, there’s plenty for them to discuss on tomorrow’s earnings call. 

For the first quarter, DIS is expected to report adjusted earnings per share of $1.62, up from $1.55 in the prior-year quarter, on revenue of $15.24 billion, according to third-party consensus analyst estimates. Revenue is expected to increase 3.1% year-over-year. Below is a quick recap of what’s been going on at the company’s main segments.

Media Networks

In Q4 Fiscal 2017, DIS reported that media network revenue declined 3% year-over-year (YoY) to $5.47 billion, and ended the full year down 1% YoY for a total of $23.51 billion. Media network operating income dropped 12% in the fourth quarter compared to last year, ending the year down 11% for a total of $6.9 billion.

As a result of consumers cutting the cord on pay TV and opting for video-streaming services, this segment has faced pressure from subscriber losses. Last quarter, DIS reported subscriber rate losses of 3%, although management said they were encouraged that this was an improvement from the 3.5% drop in the quarter before.

On last quarter’s call, CEO Bob Iger said that the company’s highest priority in fiscal 2018 is building a direct-to-consumer relationship. To that end, DIS plans to launch an ESPN-branded streaming service this spring and a Disney-branded streaming service in 2019. The proposed acquisition of FOXA assets would also make it the majority owner of streaming service Hulu.

Parks and Resorts

This segment has been DIS’ fastest growing in recent quarters, helped by the 2016 opening of Disney Shanghai. In Q4 fiscal 2017, DIS reported that parks and resorts revenue increased 6% YoY to $4.67 billion, while operating income increased 7% to $746 million. For fiscal 2017, revenue in the segment was up 8% YoY to $18.42 billion and operating income increased 14% to $3.77 billion.

One factor that influenced last quarter’s results was Hurricane Irma and its impact on Walt Disney World in Florida. Management estimates the hurricane shaved off $100 million in operating income and negatively impacted operating margins at domestic operations by 220 basis points.

Studio Entertainment

After DIS’ record-breaking year in fiscal 2016 for its movie business, the company faced challenging comparisons. In fiscal 2017, DIS reported YoY declines in studio entertainment revenue and operating income, which ended the year down 11% and 13%, respectively. DIS released three films during Q1 fiscal 2018: Thor Ragnarok, Coco and Star Wars: The Last Jedi

A SMALL GAIN. Since the start of 2017, Disney (DIS) is up 2.47%, lagging the S&P 500’s (SPX) 22.34% increase over the same time periods. The stock has been a little all over the place and has seen some large intraday swings over the past few months. The bottom chart shows implied volatility. Chart source: thinkorswim® from TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Disney Options Trading Activity

Around DIS’ upcoming earnings release, options traders have priced about a 4.2% potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility is at the 91st percentile as of this morning. 

In short-term trading at the Feb. 9 weekly expiration, calls have been active at the 112 and 113 strike prices, while puts have been active right around the money at the 108 and 109 strikes, with trading a little bit lighter on the put side.

At next week’s Feb. 16 monthly expiration, both calls and puts have been active at the 110 strike. At the end of Friday’s trading session, the 110-strike call had open interest of 9,505 contracts and the 110-strike put had open interest of 7,839 contracts.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Last week brought results from many of the major tech companies and earnings season has started to calm down a little bit. This week is one of the last really crowded ones, with reports due out from Tesla Inc (NASDAQ: TSLA), NVIDIA Corporation (NASDAQ: NVDA) and Twitter inc (NYSE: TWTR), among others.

There are also some big consumer discretionary names scheduled to report over the next few weeks, including The Coca-Cola Co (NYSE: KO), Wal-Mart Stores Inc (NYSE: WMT), Target Corporation (NYSE: TGT), Macy’s inc (NYSE: M) and MGM Resorts International (NYSE: MGM). Retail sales also comes out Wednesday, Feb. 14, which could add a little volatility when combined with major earnings releases.

And if you have time, make sure to check out today’s Market Update to get a rundown on what else is going on after Friday’s market drop.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.


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