Entertainment and media conglomerate The Walt Disney Company (DIS - Free Disney Stock Report) has issued fiscal first quarter results (year ends September 28th). The House of Mouse got off to a humble start in the December period. In all, profits slipped 36%, to $1.86 per share, $0.64 below our estimate; while revenues came in flat at $15.3 billion, versus our forecast of $15.6 billion. 

Even though the earnings report was not that exciting, investors seemed to be fine with the company's near-term prospects (discussed below). The shares are mostly unchanged in early morning trading.

During the quarter, Disney recorded improvements in its Media Networks and Parks, Experiences, & Consumer Products divisions. However, year-to-year comparisons suffered from lower theatrical releases in the fiscal 2019 first period. As a result, the media conglomerate registered steep losses in Studio Entertainment and it experienced setbacks from Direct-to-Consumer and International segments due to higher investment in its new platforms. 

This year will likely be a transformative one for the company, owing to the pending Twenty First Century Fox (FOXA) acquisition and the launch of the Disney+ streaming service. To review, in December of 2018, Disney proposed to buy the bulk of Fox's television and film properties in a $71.3 billion cash-and-stock deal. The merger, which ought to create a powerhouse of brands and lead to significant cost synergies, awaits some closing conditions, but is anticipated to close in the back half of fiscal 2019. 

Looking ahead, the company will probably focus on investing in content creation, innovative technology, and building a robust direct-to-consumer (DTC) platform.  

Disney has already made inroads in the DTC space, namely thanks to last year's launch and increased adoption of ESPN+. And it will continue to leverage the BAMTech properties and technology (which it acquired in 2017) to support its streaming services.  

The media conglomerate plans to roll out its direct-to-consumer video streaming service, Disney+, in the coming months. Management outlined the plans for the new platform a couple of years ago. We expect that the company will migrate much of its content library and entertainment brands to Disney+, and further down the road, it will likely develop original programming exclusively for that platform. All in all, we believe this move will enable the media mogul to compete with other content creators, such as Netflix (NFLX) and Amazon.com (AMZN) Studios. 

In the meanwhile, Disney has redefined its operating segments. It now breaks down business results under Media Network; Parks, Experiences, & Consumer Products; Studio Entertainment; and Direct-to-Consumer and International divisions.

We are tempering our fiscal 2019 estimates. We think that some of the struggles Disney experienced during the December period will persist through the second quarter. Although we are cautiously optimistic that the company will rebound in the back half of the year, we reiterate that as per Value Line convention, our estimates do not reflect the pending Fox merger. As a result, we have cut our sales estimate by $600 million, to $60.02 billion. Too, we shaved a nickel off of our earnings-per-share estimate to $8.45. Thus, the top and bottom lines will probably only tick up at a 1% clip this year.  

Overall, this issue offers worthwhile risk-adjusted total return potential over the next 3 to 5 years. That said, the stock's recent pricing momentum has moderated some of its long-term capital appreciation potential. Further, more conservative investors may want to wait on the sidelines until some of the dust surrounding the Fox tie-up, the DTC rollouts, and restructuring begins to settle.

About The Company:The Walt Disney Company operates Media Networks such as ABC and ESPN, and Studio Entertainment. Its world famous parks and resorts include Disneyland, Walt Disney World (Magic Kingdom, Epcot, and Disney’s Hollywood Studios), while the company earns royalties from Tokyo Disneyland and manages Disneyland Resort Paris and Hong Kong Disneyland. It also operates a cruise line and Consumer Products and Interactive Media segments. ABC was acquired in February, 1996; Pixar in May, 2006; and Marvel in December, 2009.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.