Disney Earnings: Near-Term Bearish, Long-Term Bullish

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It looks like ESPN sub churn continued during the quarter.

A rainy December in Los Angeles likely negatively impacted Disneyland attendance.

The studio business performed well, but had an exceptionally tough comp.

Hasbro's blow-out results imply strength for Disney's Consumer Products segment.

Overall, we are near-term bearish and long-term bullish.

Disney (NYSE:DIS) is set to report Q1 earnings after the bell on Tuesday, 2/7. The stock is up almost 20% over the past 3 months, and we think shares are set to give up some of those gains after the report. Our research indicates that ESPN sub churn continued while park attendance was negatively affected by weather. These near-term headwinds will create what we view as a "buyable" sell-off, as we remain bullish on the long-term growth story behind a strong FY17 and FY18 movie line-up, OTT distribution of ESPN, and resumed park attendance growth.

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Our thoughts on the quarter by segment are as follows.

  • Media Networks: Recently, Nielsen announced that ESPN and ESPN2 continued to lose subs in December and January, a bearish downward trend that puts ESPN/ESPN2 subs in the ballpark of 87.7 to 87.8 million. Per the most recent 10-K, that would be a decrease of roughly 2 million since last quarter. Overall, our research corroborates this bearish trend, with NBA and NFL weakness offsetting college football strength. NBA on ESPN had a soft opening weekend, and that softness continued into Christmas, with average per game viewership heading into Christmas down 9% YoY (this is despite some games with huge growth numbers). The Cavs-Warriors headline game provided a nice ratings boost on Christmas, but other Christmas Day games disappointed. On the college football front, ESPN reported that 680,000 less people watched this year's college football championship relative to last year, but that total viewership among major Bowl games was up 15% YoY. NFL ratings were also down 8% YoY, according to ESPN. The Australian Open provided a boost to ratings in January, but that won't be reflected in the quarter and doesn't fully negate the overall downward trend in ESPN viewership. Overall, we are bearish on how ESPN performed in the quarter, but remain long-term positive on the growth potential of OTT distribution of ESPN.
  • Parks and Resorts: Given poor weather conditions in California and unimpressive crowd numbers coming out of China, we have a bearish outlook on the Parks segment for the quarter. Likely due to an exceptionally rainy December in the Los Angeles area, it looks like Disneyland park attendance was considerably down YoY during the Holidays (use this calendar to see how much more crowded December 2015 was than December 2016). It also appears as though attendance at Shanghai Disney is waning, as the company is averaging a rather pedestrian 28,000 visitors per day. It doesn't particularly help that rides are breaking down. Given the return of a Florida resident deal, it also looks like Disney World didn't have the best Holiday season either. Overall, we are bearish on the Parks segment this quarter.
  • Studio: The movie line-up in the quarter performed quite well considering the difficult lap. While Rogue One understandably underperformed relative to The Force Awakens last year, Moana and Doctor Strange partially offset those YoY declines. Overall, according to Box Office Mojo, Disney's studio revenue was down roughly 12% YoY in the quarter. While that isn't great, it is pretty good considering the record-breaking lap, and we remain long-term bullish on the 2017 and 2018 movie line-up.
  • Consumer Products: Hasbro (NASDAQ:HAS) reported blow-out results on Monday, 2/6, led by exceptional strength in the Disney Princess and Frozen lines. Consequently, we believe Disney will report good numbers here on Tuesday. Long-term, the launch of Cars this year will be a significant revenue tailwind.

Overall, while we think Disney sold a lot of toys in the quarter, we do not think that was enough to offset a down park attendance quarter, a down studio quarter, and continued ESPN sub churn. Given the stock's strong run-up over the past several months, we think Disney stock is set to fall on an unimpressive report. We believe that sell-off, though, is a good time to accumulate shares as we remain bullish on the company's long-term growth story.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DIS over the next 72 hours.

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.