Walt Disney Co. has a profit problem, and it has helped send the media giant’s shares to their worst daily performance in more than two decades.
Although Disney DIS,
posted record sales in its most recent fiscal year, executives stunned investors with their segment operating profit forecast, which the company uses “as a measure of operating business performance separate from non-operating factors,” according to its release. hurry.
Executives expect high-single-digit growth on the metric in the new fiscal year, which was well below analysts’ expectations. The outlook versus a consensus view of 25% growth, according to MoffettNathanson analyst Michael Nathanson. He personally expected 34% growth.
“Rarely have we been so wrong in our forecast of Disney earnings,” he wrote in a note to clients. “Given the company’s confidence that Parks trends appear resilient, it appears the culprit for the massive earnings decline is much higher than expected. [direct-to-consumer] significant losses and drops on linear networks.
Cord cuts and other difficulties in the traditional media sector are creating “greater pressure to increase the profitability of Disney’s national parks, which are now the main engine of growth,” he continued. “Furthermore, the company must prove that its pivot to DTC will be worth the investment price currently being paid.”
This creates a difficult position for the stock, in his view.
“Overall, Disney needs the parks business unharmed by a global macroeconomic slowdown, Linear Networks earnings to stabilize and DTC earnings to emerge quickly for investors to reprice the stock at the rise,” Nathanson wrote. “At this point, the risks appear to be biased against them.”
He reiterated a market performance rating on the stock and cut his price target to $100 from $130.
Shares of Disney closed 13.2% in Wednesday trading to register their worst single-day percentage decline since September 17, 2001, when they fell 18.4%.
Cowen & Co.’s Doug Creutz wrote that while Disney executives expect the Disney+ streaming service’s losses to improve, the company’s broader guidance and feedback “seems to imply a substantial compression of margins” for linear networks and content activities.
“This brings us back to our long-standing view that treating linear and DTC as separate business segments makes little sense; they are just different distribution channels for the same content in a largely zero-sum game with vastly increased competitive intensity, aside from potential expansion into international markets,” he wrote, as he retained a market performance rating on the stock and reduced its price target to $94 from $124.
Morgan Stanley’s Benjamin Swinburne said “the importance of adapting streaming to profitability takes on a new level of urgency given the strain on the linear television business inherited from the cord-cut”, although remained bullish on Disney shares.
“[W]We remain optimistic about the Parks segment’s growth prospects, continue to expect it to represent the majority of Disney’s EPS [earnings per share] over time, and I believe the stock is undervaluing Parks assets at current levels,” he wrote while maintaining an overweight rating and $125 target price on the stock.
Bank of America analyst Jessica Reif Ehrlich said the latest report was “not as bad as it sounds.”
“We believe underlying theme park demand remains healthy and the loss of operating revenue is largely due to one-time items versus subdued demand,” she wrote. “In linear networks, DIS is experiencing many of the same headwinds that other industry players face, but we believe their iconic brands and scale/growing DTC service position them well to better handle these headwinds and industry transitions relative to their peers.”
She rates the stock as a buy but has cut her price target to $115 from $127.
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