The Walt Disney Company(NYSE: DIS) topped last quarter's earnings estimates, and then further fanned the bullish flames with better-than-expected guidance. Shares soared on Thursday following the release of its fiscal fourth-quarter results.
As veteran investors can attest, however, the devil is in the details. Sometimes things that are initially overlooked come back to undermine a rally, once investors have time to peruse the fine print.
With that as the backdrop, there are three big takeaways buried in Disney's fourth-quarter results that you may want to consider before making a buy/sell decision.
3 takeaways from Disney's Q4
For the three-month stretch ending in September, Disney turned $22.6 billion worth of revenue into a per-share profit of $1.14. Both numbers are up from the year-ago figures of $21.2 billion and $0.82, respectively. And both numbers topped estimates for a top line of just under $22.5 billion and a bottom line of only $1.10 per share.
Theatrical films and streaming accounted for the bulk of this improvement, offsetting weakness from the company's theme parks and television business.
But there are some things you'll want to know about the true condition of Disney right now.
First, although the company's film business showed a marked revenue improvement, most of last quarter's 23% increase in gross operating income was delivered by its streaming platforms Disney+ and Hulu. They collectively swung from an operating loss of $420 million in the fourth fiscal quarter of last year to operating income of $253 million this time around. This progress has been underway for some time, but only now is the streaming side decisively getting over the profit hump just now.
Data source: The Walt Disney Company. Chart by author. Figures are in millions.
Sure, the company's studio is seemingly back in growth mode, boosted by the recent release of Inside Out 2 and Deadpool & Wolverine.
Dig deeper, though, and you'll see the second takeaway: Last quarter's box office results are only relatively better than a recent soft patch for this division. Disney's films are still contributing less to the bottom line than they were before the pandemic, even with the occasional blockbuster film. But these blockbusters are now fewer and far between.
Data source: The Walt Disney Company. Chart by author. Figures are in millions.
You have to wonder if the pandemic-inspired acceleration of streaming's growth is at the heart of the film industry's current challenges.
Lastly, while Disney's guidance for the next three years calls for double-digit growth in profits per share, there's suspiciously no mention of revenue growth. It appears the bulk of any bottom-line improvements are going to remain the result of cost cutting and stock buybacks. (The company has budgeted $3 billion for buybacks in the current fiscal year alone.)
That's fine for now. It won't work indefinitely, though. There comes a point when simply reducing expenses undermines an organization's ability to win and keep new customers. At some point, Disney will need to spend more to grow its business, which is seeing stagnation on the top and bottom lines.
Data source: The Walt Disney Company. Chart by author. Figures are in millions.
And Disney's sports-entertainment business -- mostly ESPN -- continues to tread water, neither growing nor shrinking its top or bottom lines. Whatever the company intends to do with the sports-focused platform, sooner is better than later.
If the response to the impending launch of a stand-alone streaming version of the ESPN cable channel isn't strong, it could undermine any hope Disney may have of selling the entirety of the brand's operation.
Weighing the pros and cons
This isn't an exhaustive examination of Disney's current condition, just the areas you don't hear much about. For example, the company's parks and resorts segment -- its biggest in terms of revenue and profits -- is holding up, more or less growing in step with inflation. And its non-sports TV business is also losing a little ground, as the cord-cutting movement marches on.
Nonetheless, while the touted overall fourth-quarter numbers looked and sounded reasonably healthy, the closer examination above raises concerns. Streaming is doing the bulk of the heavy lifting right now, but even the company's guidance for the year now underway implies a slowdown is brewing for that segment. In the meantime, it's too soon to say that the entertainment giant's film business is permanently back to its pre-pandemic form.
Shares jumped in response to last quarter's numbers. This may have been premature buying, though. You may be better served by remaining on the sidelines and seeing if the company can get any of its businesses other than streaming going again.
For that matter, it might not hurt to temper any optimism about how much weight Walt Disney's streaming business can actually carry, or for how long.
In other words, feel free to add Disney stock to your watch list -- just think twice before adding it to your portfolio.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $22,819!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,611!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $444,355!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 11, 2024
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool has a disclosure policy.
