2015 was a fruitful year for Disney (DIS, Financial) as its stock price surged almost 13%. However, the company was off to a bad start this year as Disney shares have tumbled approximately 7%.
Recently, Disney shared disappointing fourth-quarter results, which resulted in a selloff. In the fourth quarter of fiscal 2016, the company reported earnings per share of $1.10, falling short of estimates by 6 cents. On the other hand, the company’s top line came in at $13.14 billion, $380 million less than estimates. That figure signifies a drop of almost 3%, but the company’s earnings per share were up 16% year over year.
As a matter of fact, the company’s prevailing share repurchase program was the main reason behind earnings-per-share growth in the prior quarter. Disney’s disappointing results were primarily due to the worse-than-expected performance from the company’s media networks segment.
It is well known that Disney’s ESPN platform is the backbone of its media networks business. In the most recent quarter, the revenue generated from the company’s media networks segment declined 3% year over year, and operating income plunged 8%. The company reported that ESPN’s drop in operating income was mainly due to feeble advertising as well as associated revenue and higher production and programming costs.
Considering this, stockholders became doubtful of ESPN’s ability to conserve pricing power and subscriber base in the highly competitive area. However, in spite of all the ongoing problems, the company’s management said it is taking a more optimistic position on the prospect of ESPN’s subscriber base, as it plans to introduce digital services that will open new opportunities for Disney.
Apart from this, Disney’s theme parks business is growing at a healthy rate. A few months ago, the company inaugurated its $5.5 billion “Shanghai” resort. Disney World in Orlando is the largest theme park followed by the Shanghai resort; Disney expects the Shanghai resort to outperform next year, which could be a massive deal for the company since opening costs were high in fiscal 2016.
Summing up
Disney’s stock price has retracted considerably from its all-time high mainly due to apprehension of cord cutting plundering its cable business. The company is taking various steps to get its media networks business on the right track; it is evolving its cable business with new and advanced streaming applications as well as a unique streaming service for ESPN. As an outcome, it looks like a great opportunity for long-term stockholders to accumulate Disney on the pullback.
Disclosure: No position in the stocks in this article.
Start a free seven-day trial of Premium Membership to GuruFocus.
