U.S. stocks opened lower Wednesday after a two-day rally to start the week. Disney’s (DIS, Financial) earnings report Tuesday evening after the bell was a significant factor for the market’s lower valuations. Also contributing to the losses were Macy’s (M, Financial) and Staples (SPLS, Financial), both retailers with disappointing earnings and outlooks.
Disney’s earnings results late Tuesday missed analysts’ expectations for both revenue and earnings. Revenue was $12.97 billion, up 4.1% from the comparable quarter and missing analysts’ expectations by $220 million. EPS of $1.36 missed analysts’ expectations by 4 cents. On Wednesday, shares are down 4.52 points or 4.24% to $102.08. In the broader market, the Dow Jones Industrial Average is down 144.28 points to 0.80% at 17,784.07. The S&P 500 is down 11.67 points or 0.56% to 2,072.72. The SPDR S&P Retail Index is down 1.58 points or 3.62%. In a CNBC interview, industry specialists discussed their insights on the company and its earnings report.
Segment results from the company’s earnings report included the following:
Revenue overall was 4% higher than the comparable quarter and 9% higher for the first six months of the fiscal year. EPS of $1.36 increased 11% from the comparable quarter and were up 20% for the first six months of the year. Parks and Resorts and Studio Entertainment led both revenue and operating income. Operating income for the quarter was up 10% from the second quarter of 2016. With the quarter’s results, operating income is now up 15% for the first six months of the fiscal year.
After missing analysts’ expectations, the stock has fallen considerably in Wednesday’s trading and the lower market valuation is likely because of the high price-to-earnings that the stock commands in the broader market. It currently has one of the highest P/E ratios in the DJIA with a five-year average P/E of 19.29. It also has a forward P/E of 16.81. With its high P/E levels, it must deliver above market expectations in order to maintain value, and Wednesday’s report is further evidence of the market’s high expectations for the stock.
The results from Disney combined with the Macy’s and Staples trading for Wednesday are consistent with the lower expectations for the retail industry overall. For Disney, analysts are expecting revenue growth of 7.4% and EPS growth of 10% in the third quarter. For the year, analysts are expecting revenue growth of 7.8% and EPS growth of 14%.
A few gurus do hold Disney in their portfolios; however, it is not a highly allocated stock. Ken Fisher (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio) are the two leading  guru shareholders. Fisher owns 0.53% of the outstanding shares and PRIMECAP Management (Trades, Portfolio) owns 0.41%.
Disclosure: I do not hold any shares of any stocks included in this article.
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