How to trade Disney’s share price ahead of Q3 earnings

Disney’s [DIS] share price has been a runaway success in 2019, having gained 33% for the year up to 30 July. Its biggest surge this year arrived on April’s investor day in which the company revealed details about its direct-to-consumer strategy, including the price point and name of its upcoming Disney+ streaming service. The arrival of the news caused shares to jump by 11% the next day. The share price has been on an upward trend ever since. Will its earnings update on 6 August give the company’s stock another boost? 

How Disney performed last quarter?

Disney posted an earnings beat for its second-quarter report this May. Earnings per share arrived at $1.61, slightly above analyst expectations of $1.58. Revenue for the quarter, meanwhile, hit $14.92bn, up on the expected $14.36bn. 

While the news was well-received, there were also some concerning figures in the report. Disney’s EPS fell by 13% year-over-year, marking its second year-on-year decline this year. The House of Mouse pinned this on significant investment in the launch of its Disney+ streaming service, and its lack of blockbuster movie releases in the quarter compared to the same period last year.

Is another beat in store?

Disney’s revenue performance is largely tied to how much a movie release has collected at the box office. Earlier in the year, for example, Disney reported a revenue decline because Captain Marvel, which collected over $1bn in theatres, didn’t quite match the success of Black Panther a year earlier. Market Realist’s Sneha Nahata says that studio revenues are expected to shoot up for Q3 2019 due to Disney’s success with Avengers: Endgame, which has earned over $2.9bn at the box office since its launch in April, and is now the highest-grossing film of all time. Toy Story 4 and Aladdin were also strong performers for the quarter.

Analysts are expecting revenues to grow by 41% compared to the same period last year. However, they also estimate a 6.4% fall in earnings-per-share, according to Investopedia.

Disney share price vitals, Yahoo Finance, 31 July 2019
 

What’s causing Disney’s share price to rise?

There is a lot of optimism surrounding the launch of Disney+ this November, despite expenses ramping up in preparation for the launch. 

While Disney does not expect its video-streaming app to start making money until 2024, there are multiple sources hinting that, in the long term, the platform will be a great success. A recent UBS survey has suggested that there is “strong interest” in Disney+ among consumers – and while Disney is targeting 20-30% penetration of US households by 2024, UBS says 43% of its sample group were already intrigued.

Morgan Stanley [MS] expects Disney to obtain more than 130 million ‘over-the-top’ subscribers – those watching film and TV content via the internet – by 2024. This is partly down to the fact that Disney is now set to own the entirety of Hulu, which had previously been part-owned by Disney, Comcast and Warner. Additionally, Disney is pushing for a stake in all future Hulu shows, ensuring long-term profit sharing.

Finally, Disney’s largest sales driver, it’s Parks, Experiences and Products segment, grew revenue by 5% last quarter, while operating income increased 15% to $1.5bn. Growth is expected to continue with the launch of Galaxy Edge Star Wars land, which opened 31 May in Anaheim, California, as well as a Florida site which opens its gates this autumn.
 

Is Disney a ‘buy’?

Disney stock is steadily outpacing the broader market. Its relative strength line, which tracks a stock’s performance against the S&P 500, is near its highest level in two years.

In June, Morgan Stanley boosted the media giant’s price target to $160 from $135, which represents a potential 10.4% upside from Tuesday’s close – although the most bullish analysts reckon the stock could go as high as $210, implying a 45% upside. This is all based on the success it expects from Disney’s streaming operations. 

"Our willingness to underwrite these higher DTC estimates stems from 1) a faster-than-expected global launch, 2) more IP aggregated more quickly than anticipated, and 3) a plan to leverage third-party distribution," Morgan Stanley said in a note. 

“Our willingness to underwrite these higher DTC estimates stems from 1) a faster-than-expected global launch, 2) more IP aggregated more quickly than anticipated, and 3) a plan to leverage third-party distribution” - Morgan Stanley

Ahead of its Q3 earnings report, Disney has also paid a $0.88 per share semi-annual dividend, sweetening the deal for shareholders.

Despite these factors, Imperial Capital cut its Disney rating to ‘in-line’ from an ‘outperform’ on 17 June. Imperial analyst David Miller says the stock is “now trading at record multiples”. However, the growth drivers he was anticipating when he upgraded the stock in November 2018, including the release of Avengers: Endgame and the opening of two Star Wars lands have now been “pretty much built into the stock”, he concludes.