Walt Disney Co: This Is Why Disney Stock Is Going Crazy Today

Walt DisneyThis Is Where Disney Stock Is Going Next

After generating billions of dollars at the box office, you’d expect Walt Disney Co (NYSE:DIS) stock to do well, but that’s not really the case here. In after-hours trading on Tuesday, Disney stock tumbled more than six percent.

The reason is simple—the company just posted its earnings report.

As we’ve seen many times this earnings season, a company can beat Wall Street expectations left, right, and center and its stock can still decline. And when a company misses expectations, its stock can be brutally killed.

That’s basically what is happening to Disney stock right now.

In the second quarter of the company’s fiscal 2016, Disney generated $12.97 billion in revenue, which missed Wall Street’s expectation of $13.21 billion. (Source: “The Walt Disney Company Reports Second Quarter and Six Months Earnings for Fiscal 2016,” Walt Disney Co, May 10, 2016.)

Net income improved two percent year-over-year to $2.14 billion. Excluding one-time items, Disney’s adjusted earnings per share (EPS) turned out to be $1.36. While the number represented an 11% increase compared to the year-earlier period, it missed analysts’ EPS estimate of $1.40.

Year-over-year growth was commendable, but meeting analysts’ expectations was deemed more important by the market. Right after the earnings release, Disney stock plunged nearly seven percent and broke below the $100.00 mark.

Still, that doesn’t change the fact that Disney has been growing its adjusted EPS by the double digits for 11 consecutive quarters.

As you would expect, Studio Entertainment was the best-performing segment at Disney. In the reporting quarter, revenue from Studio Entertainment increased 22% to $2.1 billion. The segment’s operating income surged an even more impressive 27% to $542 million.

The main driver of that growth was an increase in theatrical distribution results and growth in TV and streaming distribution. In particular, the performances of Star Wars: The Force Awakens and Zootopia at the box office were stronger compared to the performance of movies in the year-ago quarter.

“Our Studio’s unprecedented winning streak at the box office underscores the incredible appeal of our branded content, which we continue to leverage across the entire company to drive significant value,” remarked Robert Iger, chairman and CEO of Disney. “Looking forward, we are thrilled with the Studio’s slate and tremendously excited about the June 16th grand opening of the spectacular Shanghai Disney Resort.” (Source: Ibid.)

Media Networks, the largest segment of Disney’s media empire, saw its revenue slip slightly in the reporting quarter. Operating income, on the other hand, increased nine percent year-over-year. The main driver behind the segment’s increasing operating income was Cable Networks and the catalyst for that was none other than the much talked about sports network ESPN.

ESPN has been a focal point for Disney stock for quite some time. This time though, ESPN’s performance improved due to lower programming costs and higher affiliate revenues. The sports network did experience a 13% year-over-year decline in advertising revenue, but that’s because there were fewer college football play-off games taking place in this fiscal quarter compared to the previous year.

Parks and Resorts is the second-largest revenue contributor at Disney. In the quarter, revenue from the segment increased four percent year-over-year to $3.93 billion, although the number came in below the forecasted $4.03 billion. Operating income increased 10% to $624 million.

The company is scheduled to open the Shanghai Disney Resort next month. It will be the first Disney theme park in Mainland China.

The Bottom Line on Disney Stock

Note that this is Disney’s first earnings miss in five years. Although the company still represents strong value at today’s price and also has a handsome dividend yield, the earnings miss could lead to a prolonged period of negative sentiment toward Disney stock.