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Media conglomerate The Walt Disney Company (DIS Free Disney Stock Report) issued fiscal second-quarter results (year ends September 30th). Earnings from continuing operations came in at $3.53 a share, more than double our $1.74 per-share estimate and 81% ahead of the year-ago figure. However, excluding certain factors impacting comparability, the bottom line slipped 18%, to $1.61 a share. Revenues advanced 3% during the March period, to $14.9 billion (slightly ahead of our $14.6 billion expectation). Investors had a rather ho-hum reaction to the report, and the stock was little changed on the news.

Reviewing the company's latest earnings release, Disney's Parks, Experiences, and Products segment was the brightest star. Growth at Disney's domestic parks was helped by the favorable timing of the Easter holiday, as well as higher guest attendance and spending.

Studio Entertainment declined during the period, likely due to the unfavorable year-to-year comparisons against 2018 blockbusters Black Panther and Star Wars: The Last Jedi versus Captain Marvel this year. Looking toward the third quarter, however, Marvel's Avengers: Endgame ought to lift this segment out of the doldrums. Endgame has become the second-highest grossing film of all time. Moreover, Disney plans to stream the movie exclusively on Disney+ come January, which should give its Direct-to-Consumer (DTC) and International unit a hand.

That said, the DTC and International segment suffered during the March quarter, widening its loss, owing to higher operating costs, the consolidation of Hulu, and losses from streaming technology services. Lastly, Media Networks posted a modest year-to-year decline, due to higher programming costs at broadcasting, which was partially offset by gains from ESPN and its other cable divisions.

Disney completed its acquisition of the bulk of Twenty-First Century Fox's assets on March 20th. During that stub period, revenues were $373 million and operating income was $25 million. What's more, the earnings release incorporated the consolidation of Hulu (Disney now owns about a third of the joint venture). Looking ahead, we believe the combination will lead to significant synergies and create a powerhouse of brands. That said, the deal will likely be dilutive to near-term results, and may reduce EPS during fiscal third-quarter by $0.35.

The company laid out its strategy for its DTC platform at its investor day in mid-April. The media conglomerate plans to launch Disney+ in mid-November. The subscription-based DTC offering should better leverage The House of Mouse's content library, as well as its Marvel, Pixar, Star Wars, and some more recently acquired Fox brands (such as The Simpsons). The company previously launched (and has seen success from) ESPN+, and we expect its embrace of the streaming platform will enable it to better vie against digital media behemoths Netflix (NFLX), Amazon.com (AMZN) Prime Video, and other competitors. While we are optimistic that Disney+ will position the company nicely over the long haul, the cost of the build out may drag on the bottom line in the near future. In fact, the streaming service will probably not be profitable until 2024.

We expect that the fiscal third quarter will be a mixed bag. While the box office success of the latest Avengers installment should bolster the top line, we suspect the costs surrounding Disney+ and the dilutive impact of the Fox acquisition will hinder bottom-line growth. And these factors will likely overshadow the media conglomerate's totals in the back half of fiscal 2019, leading Disney to post lackluster year-over-year comparisons.

All told, we are maintaining our revenue outlook, and believe the top line will expand 25%, to $72.3 billion for fiscal 2019. We have added $0.30 to our earnings-per-share estimate and look for share net to climb 5%, to $8.75 for the full year.

This blue chip has built a lot of momentum over the past few years, and the company's ongoing focus on monetizing its brands and content has pleased investors. In fact, the stock price jumped after management announced details about the upcoming Disney+ launch last month. However, the recent uptick has curtailed some of DIS' long-term capital appreciation potential.


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.