After a year of marching in place, Walt Disney (NYSE: DIS) steps up on Tuesday with its latest financial results. The media giant’s stock is essentially where it was in early January, and how well it fares in its upcoming fiscal third-quarter report will determine whether Disney finally breaks out or buckles.
Analysts are holding out for healthy growth. They see revenue rising 7.7% to $15.34 billion, with the bottom line growing even faster. Wall Street expects Disney’s earnings per share to rise 23.4%, going from $1.58 to $1.95.
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There’s going to be a lot of attention paid to Disney’s report shortly after Tuesday’s market close. Let’s go over a few things that it needs to nail in the announcement and subsequent earnings call.
1. Studio entertainment will have to do the heavy lifting
Disney was in rare form last time out. All four of its operating segments came through with positive growth, something that we haven’t seen very often lately at the House of Mouse. The 9% pop in revenue was Disney’s best showing in more than two years.
Things will get more challenging in some of its businesses this time around, though it will benefit from the prior year’s sandbagged results. Revenue growth was flat in last year’s fiscal third quarter, as strength at its theme parks helped offset top-line declines at Disney’s three other segments. Studio entertainment should be the big winner this time around, bouncing back from last year’s 16% and 17% slides in segment revenue and operating profit, respectively.
Two of this year’s three highest-grossing movies — Disney’s Avengers: Infinity War and The Incredibles 2 — hit theaters during the quarter. The top movie also belongs to Disney, and Black Panther will spice up the quarter despite its February release date, because it hit the DVD market in May.
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2. Theme parks need to rise above
There are two big things weighing against Disney’s theme parks division this time around. The timing of the Easter holiday helped juice up the quarter ending in March, at the expense of the period that just ended in June. We saw all five theme-park and regional amusement-park operators post double-digit percentage growth during the quarter that ended in March. None of the three public companies that have already reported results this quarter have cracked that ceiling, and one of them actually saw its top line decline.
The other headwind gust blowing in Disney’s face this time around is that Disney World’s Avatar-themed expansion, a wild success in May of last year, had no analogue this time around. Disney World’s Toy Story Land didn’t open until just as the quarter was coming to a close. If it provides a boost, it will come during the current quarter instead.
Disney has been able to overcome sluggish attendance trends in recent years by expanding its overnight resorts and boosting ticket prices. We’ll see if that was enough this time around.
3. Beating is believing
Disney is coming off of back-to-back quarters of posting better-than-expected earnings. It will have to stretch that streak to three quarters for investors to feel that the media giant can overcome the sluggishness of its media networks and consumer products divisions.
There will naturally be plenty of things at play on Tuesday afternoon. Now that Disney has a clear path to close on the costliest acquisition in its history, it may be more forthcoming about what the mother of all content deals will mean for the media behemoth. It may or may not address the directorial upheaval with the Guardians of the Galaxy franchise. Any visibility into how the company’s streaming initiatives are coming along would also be huge.
However, as long as its studio entertainment division brings home the bacon, its theme parks hold up against rough year-over-year comparisons, and it surpasses analyst targets, this should be a winning week for Disney’s investors.
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Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.
