Disney Gets the Financial Win It Needs But the Stock Struggles
The Walt Disney Company reported its earnings this morning, and nobody quite knew what to expect.
On the one hand, Disney made the bold decision to switch its reporting to 30 minutes before the market opened.
Conversely, new CFO Hugh Johnston had typically handled his PepsiCo earnings with pre-market reports as well.
So, we weren’t sure whether to read anything into the earlier time or not.
What we do know is that Disney needed a win here for reasons I’m about to explain.
Thankfully, Disney reported solid Q2 2024 earnings. Here’s what we just learned.
About Disney’s 2024 to Date
The last time Disney reported quarterly earnings, tensions were high.
Activist investor Nelson Peltz was still trying to push his way onto Disney’s Board of Directors.
While the attempt failed badly, Peltz’s attempt to split Disney’s Board proved advantageous to the company.
I say this because a highly motivated CEO Bob Iger is a good thing.
With his feet held to the fire, Iger came up with several fascinating new ventures, including the so-called Sports Hulu and a Fortnite-adjacent Disney digital universe.
Still, the conventional wisdom is that Disney’s future hinges on the success of its streaming services.
So, Disney needed to report improvements in its Direct-to-Consumer (DtC) division to impress Wall Street.
Adding some Disney+ and Hulu subscriptions would help as well, as those are the things investors want to see.
Disney must turn DtC from a loss leader into a viable source of revenue gains, something Iger has promised is coming soon.
In fact, based on the CEO’s stated timeline, this is one of the last two quarterly earnings reports where Disney could list a loss in DtC.
Disney has suggested the division will turn a profit by the fiscal fourth quarter of 2024…and this is the fiscal second quarter.
The time is nigh on this front, but the rest of Disney’s earnings report was expected to be more of the same.
I say this because Iger already quelled the rebellion from Peltz and his puppet master, Isaac Perlmutter.
So, today’s earnings report cannot help but seem anticlimactic now that the kingdom is no longer in peril.
The Three Cores of the Disney Empire
As a reminder, Disney consolidated its businesses a while back, which makes direct year-to-year comparisons a bit challenging.
At this point, Disney subdivides into three core businesses: Entertainment, Sports, and Experiences.
Entertainment includes DtC and Disney’s film and Linear Networks businesses.
Sports is just ESPN and ESPN+, and it’s not lost on anybody that Disney separating this section makes it that much cleaner to spin off.
Nobody expects Disney to do that in the short term, given Iger’s propensity to praise all live sports.
Still, I would describe Sports as the least significant of the three divisions in terms of meaningful impact to Disney’s bottom line.
Finally, we have your and my favorite division, Experiences, the much simpler name for what we once called Disney Parks, Experiences and Products.
I, for one, don’t miss that name. Still, Experiences claimed two-thirds of Disney’s 2023 operating income.
As such, the Experiences numbers affect Disney’s bottom line more than anything else.
How Did Disney Perform Last Quarter?
As usual, Wall Street suggested its own earnings estimates for Disney.
When Disney matches or surpasses these estimates, it’s had a good quarter, and the stock usually goes up.
If Disney misses estimates, we need more context on how much of a shortfall the company has experienced.
Still, in such instances, the stock often drops, sometimes by several dollars.
If Disney has a miss like that today, you’ll suddenly read all about how shareholders should have sided with Nelson Peltz.
In other words, that’s the doomsday scenario Iger wants to avoid. But did he?
Wall Street projected revenue of $22.1 billion, an amount that suggests moderate growth from Disney’s $21.82 billion during Q2 2023.
Similarly, Wall Street showed significant optimism in expecting Disney’s earnings per share (EPS) of $1.10.
That total would be 17 cents higher than Q2 2023’s $0.93.
In actuality, Disney reported diluted EPS of $1.21 from quarterly revenue of $22..08 billion.
Notably, the actual EPS was the loss of a penny, though. So, this glass is half-full or half-empty, depending on whether you like Disney stock.
That’s a solid performance overall with two theoretical hits, although both are debatable since there’s rounding involved.
More importantly, it should keep Peltz at bay. Don’t feel too bad for the billionaire, though…and not just because he’s a billionaire.
Peltz and his buddy, Perlmutter, own millions of shares of Disney stock. So, they’ll benefit from the likely stock bump.
About Disney’s Core Divisions
Analysts have gotten a bit proactive with the new Disney.
Since people know Disney’s three cores and have gained recent transparency with its bookkeeping, they can predict more.
Specifically, analysts listed revenue predictions for each of Disney’s divisions.
The expectation was that the Entertainment division would earn $10.31 billion, Sports $4.33 billion, and Experiences $8.18 billion.
In reality, here’s the data:
- Entertainment — $9.8 billion
- Experiences – $8.393 billion
- Sports — $4.312 billion
Overall, Disney has missed by more than half a billion on Entertainment, while improving on the others. But remember that there’s more to the story.
We also need to know how DtC did. During Q1 2024, Disney reduced the losses in this division to $138 million with revenue of $5.546 billion.
Wall Street will view any larger streaming losses as worrisome. Thankfully, the division managed revenue of $5.642 billion.
As for the DtC “loss,” CFO Hugh Johnston indicates growth in the entertainment section, with a loss of $18 million.
Wall Street had also estimated an increase in core subscribers to Disney+.
As a reminder, during the prior quarter, Disney lost four million subscribers.
However, the company had promised a gain of 5.5-6 million this quarter due to the arrival of Taylor Swift: The Eras Tour.
Wall Street was more cautious in predicting four million new Disney+ core subscribers.
In reality, Disney reported 6.3 million new subscribers, which proves yet again the drawing power of Taylor Swift.
Overall, this feels like a good day for Disney, and the news should only improve later. For the moment, the stock is down in pre-market trading, though.
The Anaheim City Council is expected to rubberstamp the DisneylandForward project, thereby securing the future of The Happiest Place on Earth.
Today’s a big day for Disney as a whole!
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