Earnings Review Walt Disney Company’s Third Quarter Cost Turn Earnings to Dust

Thanos snapped his fingers and destroyed Walt Disney Company’s (DIS) third-quarter results. The entertainment company failed to meet the street’s expectations for sales and profits. Analysts pegged earning-per-share (EPS) of $1.75 on $21.47 billion in revenue. Our model pointed to sales of $22.5 billion and EPS of $1.79.

Both guesstimates were turned to dust as Mickey Mouse’s company registered $20.25 billion on the topline and $1.71 on the bottom line. 1 Wall Street’s reaction to the misses was a pure horror show with the stock sliding more than 5% during trading.

Management offed up all sorts of excuses- uuuhumm, reasons for the lackluster quarter. They said integrating the acquisition of 21st Century Fox diluted earnings-per-share by approximately $0.60 per share, $0.25 more than anticipated.

DISNEY+, their answer to NETFLIX, saw its losses grow to $553 million from $168 million year-over-year.

Results in this division were roughly $133 million lower than forecasted – man that hurts. Finally, the number of people visiting their iconic theme parks was below expectations, although sales increased 7% compared to last year.

We were concerned with rising costs in our DIS earnings preview along with an out of the ordinary “other income” entry. Net margin fell to 8.69% of revenue in this year’s third quarter versus 19.15% last year. It also fell quarter over quarter down from 36.54%, although minus the magic $4.963 billion in “other income”, the third quarter would be an improvement over quarter two.

Despite the gory, bloody, post earnings selloff, a couple of analysts still believe in Disney.

JPMorgan analyst Alexia Quadrani deemed the 5% slide as a “great buying opportunity.” She attributed most of the disappointment to excuse number one, the acquisition of 21st Century Fox, and told clients, “Investment thesis is the same and if we liked the stock before earnings, we love it on any weakness.” Quadrani reaffirmed her $150 price target and maintained her “Overweight” rating.

Morgan Stanley analyst Benjamin Swinburne echoed Quadrani’s view, again pointing to 21 st Century Fox as the culprit. He believes the acquisition will eventually overcome integration ups and downs and be a powerful driver in the quest to compete in the streaming space, i.e. take on NETFLIX. Swinburne sees $160 as his price target and carries an “Overweight” recommendation.

Weakness may indeed offer investors a “great buying opportunity.” The question is, how much weakness? The stock traded down to support at $132.50 and rebounded from there. From experience, earnings disappointments tend to linger. It would not be surprising to see shares test a clear line of
support at $130. The level will be crucial. If the stock trades lower than a buck thirty, then it could head to a real danger zone.

DIS gapped higher, from $117sh to $125ish on the hype and early results of Avengers: Endgame. Should sellers take Disney below $125, it could wipeout the Avengers rally with a snap of the fingers.

As for hitting either analysts price targets of $150 or $160, that would require DIS trading at 23.22 or 24.76 times next year’s consensus earning prediction of $6.46. 3 Both price-to-earnings (P/E) ratios are well above Disney’s 10-year average P/E of 18.98 and close to the decade high of 25.7.
Considering earnings are expected to decline in 2020 versus 2019, it’s hard to make a case for the company trading at the upper end of its P/E range.

The Play: Investors might wait to see how Walt Disney Company’s (DIS) stock price plays out in the next couple of days/weeks. Our experience says the odds favor shares going lower before they go higher.

There is a real danger of closing a gap to the downside if the price closes below $125.

Couple technical danger and rising costs damaging the company’s financial statements, and it’s hard to give Walt Disney Company’s (DIS) stock a positive review.