Disney Earnings: 2 Key Points Investors Should Watch For - TheStreet

Walt Disney Co. (DIS) - Get Report reports its quarter ended September this Thursday after the bell. 

This may be one of the company's most important public announcements that should cover its long-term strategy given its acquisition of Twenty-First Century Fox Inc. (FOXA) - Get Report assets, investments in emerging businesses in the media space and its 2019 outlook. 

Wall Street analysts are expecting adjusted earnings of $1.35 per share on revenue of $13.74 billion. Shares fell Wednesday afternoon ever so slightly, as the broader market climbed

Investors will likely watch for management's comments and the metrics on investments in direct-to-consumer digital subscription media services, partly resulting from its deal with Fox. 

The Fox Deal

Television revenue is declining, and the Disney-Fox deal is designed for Disney to stake its claim in the digital media business. "This will be an important call for the outlook Disney may provide on Fiscal Year 2019, given the Fox integration and OTT (over-the-top) investment costs it will undergo," Macquarie analyst Tim Nolllen wrote in a note this week.

While Disney can start counting profits added into its business from the Fox assets it has acquired, it will only do so once the deal officially closes, which it has gotten regulatory approval to do. "International media nets will also be reported with the OTT performance, but this will be Disney only until the Fox deal closes," Nollen said. Perhaps management will give the market some guidance on when that closure may happen.

For now, Nollen is relatively upbeat on what those newly Disney-owned digital asset can do for earnings. "We believe Disney will be a long-term winner in media, with direct-to-consumer subscriptions and Fox scale driving meaningful value over time, and we think extra investment to get there is manageable."

RBC Capital Markets analyst Steven Cahall says the Fox assets can contribute roughly 21% of EBITDA (earnings before interest tax depreciation and amoritization) by 2020. "We estimate Disney stand-alone fiscal year 20 EBITDA of ~$18.3bn + ~ $5bn from FOXA," Cahall wrote. 

DTC Business

Of course, most of the Fox assets are in the digital business. Macquarie's Nollen says Disney will likely use the funds from its $15 billion sale of Sky TV right way. Management has said some of the cash from the deal will fund the launch of the direct-to-consumer product in fall 2019. In a digital entertainment space that demands that players own original content in order to stay competitive, Disney may use the cash to do just that.

"We expect Disney to step up its original content slate or buy content (or buy back rights) in the near term to pad the launch," Nollen said. The investments could turn profitable within three years, he says. "Commentary on the investment costs involved with this effort, as well as any expectation of eventual upside, could be key drivers of the stock in the near term," he concluded. 

RBC's Cahall said "Disney has laid out its long-term strategy and it's all about taking its content DTC." The media giant will also hold 60% of Hulu once the deal with Fox closes, which means much more upside potential in digital subscriptions. Owning the majority of Hulu, Cahall notes, means Disney can use Hulu to distribute ESPN content. 

Both Cahall and Nollen point out that near-term operating income will likely be dragged down slightly by the operating spend on the DTC platform. 

While this may be an exciting time for Disney, the competition for digital subscription market share is heating up, a risk noted by Cowen analyst Doug Creutz. "While the incumbent network players are now moving to launch their own streaming products, since we view the problem as a structural one of deep-pocketed, low-margin entrants putting the competitive squeeze on high-margin incumbents, we don't expect these new product launches to alleviate margin pressure," Creutz wrote. 

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