Keep Disney or Dump It for Electronic Arts and Hasbro
The market is taking Disney (DIS) - Get Report to task following its first quarterly earnings miss in five years.
Concerns about the broadcast media division continue to dog the company, as cable network revenue fell 2% to $4 billion in the period. The company's media networks accounted for 44% of Disney's revenue in 2015, making it far and away its largest business segment.
The media segment's struggles have been discussed at length for months and its results were not surprising. However, faltering consumer products and themepark revenue did take the market by surprise. Consumer products and interactive media revenue fell 2% year over year to $1.2 billion, but according to analysts at Bernstein, outsized earnings expectations were more of a problem in the quarter than core business fundamentals.
"Consumer products was the main source of pain when compared to expectations. We believe this was bad forecasting, not a business problem. But the end result is the same," Bernstein Senior Analyst Todd Juenger wrote today. "Basically, we see no signs that the businesses are operating poorly, or are facing new or heightened threats. Forecasts were just over-exuberant, especially on consumer products, and need to come down."
While Real Money's Jim Cramer continues to favor being a long-term buyer of the stock, he did offer advice on alternative plays in a note today.
"I know it sounds crazy. For years, everyone who tried to do ancillary sales with Disney pretty much came to nothing, and you ended up thinking 'why do I need these other plays, these derivative stories, when I can just own the real deal,'" Cramer wrote. "You can't anymore, though. Wall Street has decided that Disney is about anything but the movie stream, while EA is up huge this morning, in part on the strength of selling 14 million copies of Star Wars Battlefront, a gigantic number."
Cramer recommended Electronic Arts (EA) - Get Report and Hasbro (HAS) - Get Report as ancillary plays that remain attractive. Though that attractiveness is thanks mainly to sales of Disney products like the smash hit Star Wars video game and Star Wars memorabilia -- which reportedly generated $700 million in sales on their own in 2015.
Meanwhile Bernstein took a similar stance on the company's themepark segment. While Walt Disney Parks revenue rose 10% to $624 million, attendance in the quarter was relatively flat and the revenue growth was mostly due to higher ticket prices and visitors having to spend more at the parks. However, Bernstein analysts wrote that the revenue slowdown was "purposeful yield management" and pointed to improved margins as evidence for that assertion.
"There are a lot of factors, many of which will persist, but we believe the biggest driver was a concerted management effort to focus on yield/profitability vs. volume," Juenger wrote. "In fact, FQ2 revenue growth has decelerated each year for the past four years -- but margins have also improved each year."
Disney was down nearly 5% on heavy volume midday Wednesday after reporting second-quarter earnings of $1.36 per share on revenue that increased 4% year over year to $12.97 billion. Analysts, on average, were expecting the company to report earnings of $1.40 per share on revenue of $13.2 billion.
While those numbers failed to meet expectations, Jim Cramer said he finds it odd that the analysts on the call failed to mention Disney's best-performing segment, its movie studios.
"Nothing's more stark than the way that CEO Bob Iger ended his conference call: "I want to add one thing, I am actually kind of surprised that after 45 minutes of questioning we didn't get one question about our studio. But I just want to reiterate that the studio's results were up tremendously for the quarter and up over 60% for the first two quarters of the year," Cramer wrote.
"To me, it's more than just an oddity; it's a statement that Wall Street totally undervalues the studios and overvalues everything else. However, the judgment's been made: Hasbro and EA are the investible Disney stories ... at least for now."
Disney is a Trifecta Stocks holding. Learn more about DIS and this product here.
