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Media and entertainment conglomerate The Walt Disney Company (DIS Free Disney Stock Report) issued fiscal second-quarter (ended March 31st) results after Tuesday's closing bell. Investors were initially pleased by the earnings report and sent these shares modestly higher in after-market trading; however, DIS stock soon gave back those gains on rumors regarding a potential interruption in the forthcoming Twenty-First Century Fox (FOXA) merger (more below).

March-period earnings were $1.84 a share, a 23% increase from the year-ago period and $0.14 above our $1.70 estimate. Revenues grew about 9% year over year, to $14.5 billion, coming in ahead of our $14 billion forecast. 

Much of the media conglomerate's recent performance was driven by its Parks & Resorts and Studio Entertainment segments. These divisions more than offset sluggish showings in Media Networks and Consumer Products & Interactive Media, which registered single-digit profit declines in the past quarter.

During the three-month span, Parks & Resorts recorded higher income on a year-over-year basis, thanks to a benefit from the timing of the Easter holiday, increased attendance, and elevated guest spending at both its domestic and international properties. Looking ahead, the company plans to continue to invest in its theme parks.

What's more, Studio Entertainment had a record period, largely owing to the blockbuster success of Black Panther. The Marvel Comics Universe and other movie franchises will likely be key growth drivers over the coming years.

Last year, Disney announced plans to migrate to its own branded subscription streaming platform by 2019. The new service, which will likely incorporate a slate heavy with classics, recent releases, and exclusive original programming, should help better leverage and distribute its branded content.

Meanwhile, the company has already taken a step in the right direction in strengthening its digital position. It recently launched sports streaming service ESPN+. Nevertheless, higher costs associated with the technological investment, lower advertising revenues, and losses from its joint venture Hulu caused the Media Networks division to struggle during the period.

Disney is reorganizing its business segments. It will group content generators Studio Entertainment and Media Networks together, ahead of the direct-to-consumer transformation. And management will pair Parks & Resorts with Consumer Products & Interactive Media. This move should align nicely with the conglomerate's long-term strategy, enable it to focus on high-quality content and technological innovation, and expand its geographic reach. Too, Disney may eye other acquisitions to complement this growth plan.

Disney offered little detail about the progress of the Twenty-First Century Fox acquisition in its earnings call. To review, Disney offered to buy the bulk of its industry peer for $52.4 billion in stock (plus $13.7 billion of Fox's assumed debt). Overall, we think the deal will augur well for the companies. The combination would create a powerhouse of brands, complement Disney's direct-to-consumer growth strategy, and extend its geographic and market reach. Disney reiterated that they are in the midst of gaining regulatory approval and meeting the necessary closing conditions.

Then, yesterday, news broke that Comcast (CMCSA) has made another bid for 21st Century Fox. Allegedly, the cable company, which had previously courted the media empire, is getting the financing to make a $60 billion all-cash offer. Rumors abound whether Comcast would gain the necessary regulatory clearance (in light of the stop-and-go AT&T (T) and Time Warner (TWX) have faced during their pending merger), or if Fox head Rupert Murdoch will accept the new all-cash bid. And it is possible that Disney may decide to alter its previous offer.

On its own, we think the media and entertainment company is well positioned for near-term growth. As such, we have added a quarter to our full-year fiscal 2018 share-net estimate, and now look for the bottom line to increase 15%-20% this year, to $6.75. Meantime, we are maintaining our top-line call, and figure revenues will grow at a mid- to high-single-digit clip, to about $59 billion.

The blue chip stock has had a terrific run over the past few years, and we think it still offers room to grow over the coming three to five years. That said, these shares may face some turbulence in the near term, associated with the pending Twenty-First Century Fox tie-up.


About The CompanyThe 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; Marvel in December, 2009, and LucasFilms in October, 2012.

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