Since earnings were released on August 6, Disney (NYSE:DIS) shares have fallen 11%, lagging the market almost every day. As of the July 31 settlement date, DIS was the second-most shorted stock on the Dow, with 2% of its shares sold short. That may not seem like much, but given that Disney is a leader in the entertainment industry, the company's shares are difficult to short with conviction. Instead, investors are taking profits on Disney, which was up almost 35% since January 1, at its highs on August 6. The negativity surrounding Disney, including all the media attention on "The Lone Ranger," has caused additional sellers, causing Disney shares to slowly drift lower. It also didn't help when the giant sinkhole opened up next to Disneyland in Florida. Despite the poor headline news, is all the negativity warranted?
The Lone Ranger and Other Movies
"The Lone Ranger," although a huge financial disaster, is only expected to cause between a $160 and $190 million write-down. I say 'only' because in the past 12 months, Disney's operating income was $10,579 million. Within Disney's diversified operations, studio entertainment made up 7.3% of operating income in FY 2012. Along with the hit on studio entertainment, Disney's consumer product segment, which made up 9.4% of operating income, will suffer as people become reluctant to buy Tonto and John action figures. One important thing to note is that the weekend "The Lone Ranger" premiered, it was competing against "Monsters University," also produced by Disney, which raked in a box office of $715 million versus a budget of $200 million. Moreover, the market seems to have forgotten about Disney's other major summer hit, "Iron Man 3," which brought in a box office of $1.2 billion on a budget of $200 million. As such a diversified company, a flop in one sector (despite other huge successes) should not have a significantly adverse effect on the Disney as a whole.
Investors can look forward to several of Disney's Marvel films: "Thor: The Dark World" (November, 2013); "Captain America: The Winter Soldier" (April, 2014); and "Guardians of the Galaxy" (August, 2014); as well as some of Walt Disney Studios' other productions.
Disney's media networks made up two-thirds of operating income, generating profits from ESPN, ABC and the Disney channel.
First, ESPN is a leader in sports-related programming. The upcoming football season should be a significant growth driver for ESPN, but competition for the broadcasting of other sports, such as with Fox Sport's attainment of broadcasting rights for the U.S. Open, is growing. However, it is important to note that Fox Sports paid double the "$40 million fee the United States Golf Association charged ESPN and NBC Sports." Given ESPN's strong broadcasting performance, its first-mover advantage requires other firms to pay high premiums to attain business. Thus, increasing competition in the sports broadcasting industry should not harm ESPN significantly. However, investors should continue to watch viewership, should the decline in ratings persist.
Secondly, Disney is trying to prop up ABC's weak results by producing a new show, "Marvel Agents of SHIELD." Disney's strategy of using its acquisitions in different operating segments creates additional synergies. Moreover, this strategy could lead Disney to produce Star Wars TV shows on ABC, which is still in the preliminary planning stages. This will help turn around Disney's weakest segment of its Media Networks department.
Thirdly, the Disney network has achieved the highest ratings for June to August 2013 for total viewers for: Kids 2-11; Kids 6-11; and Tweens. Disney Junior had a huge success with "Sofia the First," which was the No. 1 series for kids 2-5. The Disney Junior Channel had the most total viewers for preschoolers aged 2-5 in August.
Parks and Resorts
Parks and resorts have not had much headline action recently. This segment made up almost 20% of operating income, and it will continue to grow as the economy improves. Disney continually reinvests in its parks and resorts; moreover, the implementation of Marvel and Star Wars themes in their parks will drive additional traffic.
I have touched on two of the headlines driving Disney shares lower: "The Lone Ranger" and the weaker ratings for ESPN. "The Lone Ranger" made up only a small part of Disney's overall operating income, and its financial failure is more than made up with the huge successes of its other summer blockbusters. ESPN has a huge first-mover advantage, which will allow it to remain in a strong position despite increasing competition.
Disney is a company that continually reinvests in profitable segments. Its success with the Marvel acquisition boosted sales in its media networks, studio entertainment, and parks and resorts. A similar result should be expected with its acquisition of Lucas Arts. Investors have been flooded by negative news and they have not been able to see through the smoke. Disney is still the same great company it was before. A leader in the entertainment industry, it has consistently delivered high single-digit growth year-over-year, despite its size.
Disclosure: I am long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.