I joined CNBC’s Adam Bakhtiar and Pauline Chiou to chat about Walt Disney Co’s (NYSE:DIS) earnings release. Here are some of the notes from the spot:
The good news: Disney saw its revenues jump 7% and EPS excluding non-recurring items jump by 11%, and this despite the lack of a major blockbuster movie this quarter. Next quarter, Disney should get a nice jolt from the new Avengers movie, which will probably end up being one of the highest grossing movies of all time. Merchandising–particularly for Frozen toys and accessories–did well, up about 10%, That should do well next quarter as well due to Star Wars and Avengers toy sales.
The bad news: While Disney’s TV revenues surged 13%, its profit from the segment actually fell 2% driven almost entirely by ESPN’s higher programming and production costs. Disney had to pay more for its college and pro footbal programming. That bit deeply into profits. Is this a sign of things to come? Maybe. Sports programming costs have really spiraled over the last decade, as have cable bills. Now, consumers are pushing back, demanding lower cable bills and unbundled service. This leaves Disney vulnerable to getting squeezed.
Looking forward: Disney has a lot of momentum right now, and it is one of the few large companies that really seems to be doing well. There was no talk of “weather” or the “strong dollar” biting into revenues in the earnings release, which is remarkable given that Disney’s theme parks make up 30% of revenues.
But the real story–and Disney’s main cash cow–is ESPN. Media networks make up about half of Disney’s profits, and this is completely dominated by ESPN. With TV slowly moving to an “a la carte” model, Disney’s long-term future is uncertain. ESPN might do even better than it does today in am “a la carte” or direct-to-consumer model. Or, it might absolutely flop. It’s too early to say.
So, how is Disney dealing with the transition away from cable packages and into unbundled and direct-to-consumer service? Frankly, it isn’t. Disney’s de facto strategy has been just to charge more and pass the expenses on to the cable companies who in turn pass them on to subscribers. As of this time, Disney has not made public any plans to go direct to consumer like HBO.
In fact, Disney is going retrograde. ESPN is suing Verizon, claiming that Verison violated their terms by including ESPN in a sports package rather than as part of a basic package. Disney may well win the suit, but they are on the wrong side of changing consumer tastes.
Bottom line: Disney is a short-term buy based on the expected success of the Avengers and Star Wars movies, but don’t fall in love with it. Its core ESPN franchise is undergoing a major disruption in its business model, and this is not reflected in Disney’s lofty share price.