What Wall Street is saying about Disney ahead of earnings

Media giant and theme park operator Disney (DIS) is scheduled to report results of its fiscal third quarter after the market close on Wednesday, August 9, with a conference call scheduled for 4:30 pm ET. What to watch:

STREAMING: On May 10, Disney reported what CEO Robert Iger called “improved financial performance of our streaming business,” adding that the company was “pleased with our accomplishments” in the second quarter.

With its last quarterly update, Disney reported 157.8M paid subscribers for its Disney+ streaming service as of April 1, down 2% from 161.8M as of December 31, 2022. The company also reported ESPN+ subscribers of 25.3M, up 2% from December 31, 2022, and reported total Hulu subscribers of 48.2M, flat with 48.0M at the end of last year.

On June 2, Disney noted in a regulatory filing that the company was in the process of reviewing content, primarily on its direct-to-consumer services, for alignment with a strategic change in approach to content curation and as a result is removing certain content from its platforms. As a result of the company having removed certain produced content from its DTC services, the company will record a $1.5B impairment charge in its fiscal third quarter financial statements to adjust the carrying value of these content assets to fair value. “The company is continuing its review and currently anticipates additional produced content will be removed from its DTC and other platforms, largely during the remainder of its third fiscal quarter. As a result, the company currently estimates it may incur further impairment charges of up to approximately $0.4B related to produced content,” Disney added.

In an interview on July 13, Disney CEO Bob Iger told CNBC’s David Faber that the company may consider divestitures for some of its non-core linear networks. Iger, however, added it was the “right decision” to go into streaming, which he contends “will be a growth business.” The Disney+ and Hulu apps will be merged by the end of this year, noted Iger, adding that Disney is “better off having Hulu than not having Hulu.” Disney owns two-thirds of Hulu, while Comcast (CMCSA) holds the remainder.

ESPN: On August 2, CNBC’s Alex Sherman reported that ESPN, which likely will not launch a direct-to-consumer product before 2025, has held talks with sport leagues, including Major League Baseball, the National Basketball Association, National Football League and the National Hockey League, on being minority partners in the network. While CEO Bob Iger would prefer to keep a majority stake in ESPN, the company would consider a full spin of ESPN if they can’t reach a deal to do so, a person familiar with the matter told Sherman.

The next day, The Wall Street Journal’s Jessica Toonkel and Isabella Simonetti reported that people familiar with the plans said ESPN is working to make a stand-alone version of its flagship TV channel available as a streaming service in two to three years, or once its cable TV reach falls below 50M households. Talks with potential partners and investors have touched on several roles ESPN can play in the streaming industry, from carrying local broadcasts for pro sports teams to serving as an industrywide hub to stream any live game, people familiar with the matter told The Journal.

On August 8, Penn Entertainment (PENN) announced that it has entered into an exclusive U.S. online sports betting agreement with ESPN, via which Penn has secured the exclusive right to the ESPN Bet trademark for online sports betting in the U.S. for an initial 10-year term, which may be extended for an additional 10 years upon mutual agreement. In the pact, Penn has agreed to make $1.5B in cash payments to ESPN paid over the initial ten-year term and grant ESPN approximately $500M of warrants to purchase approximately 31.8 million PENN common shares that will vest ratably over 10 years, in exchange for media, marketing services, brand and other rights provided by ESPN. Upon ESPN Bet meeting certain U.S. OSB market share performance thresholds, ESPN could receive bonus warrants to purchase up to an additional approximately 6.4 million PENN common shares. In conjunction with the deal, Penn has agreed to divest Barstool Sports to founder David Portnoy in exchange for certain non-compete and other restrictive covenants.

STRIKES ONE AND TWO: On May 2, the Writers Guild of America said that after not reaching an agreement with Hollywood studios and streamer, its members will be on strike after its contract expired at midnight. “Your WGA Negotiating Committee spent the last six weeks negotiating with Netflix, Amazon (AMZN), Apple (AAPL), Disney (DIS), Discovery-Warner (WBD), NBC Universal, Paramount (PARA) and Sony (SONY) under the umbrella of the Alliance of Motion Picture and Television Producers,” the union told its members. It added, “Though we negotiated intent on making a fair deal-and though your strike vote gave us the leverage to make some gains – the studios’ responses to our proposals have been wholly insufficient, given the existential crisis writers are facing.”

On July 13, SAG-AFTRA, which identifies itself as “the world’s largest labor union representing performers and broadcasters,” announced that its members have elected to go on strike. The union stated after announcing its strike: “Here’s the simple truth: We’re up against a system where those in charge of multibillion-dollar media conglomerates are rewarded for exploiting workers. The companies represented by the Alliance of Motion Picture and Television Producers — which include Amazon/MGM, Apple, Disney/ABC/Fox, NBCUniversal, Netflix, Paramount/CBS, Sony, Warner Bros. Discovery (HBO), and others — are committed to prioritizing shareholders and Wall Street.”

ANALYSTS DOWNGRADE AS INVESTORS TURN ‘NEGATIVE’: On May 12, Wolfe Research downgraded Disney to Peer Perform from Outperform without a price target. The company’s direct-to-consumer subscriber and linear TV outlooks “keep deteriorating,” the analyst told investors. The firm says Disney’s plan for greater subscribers, higher prices and lowers costs “seems like cognitive dissonance.” Wolfe says the Disney+ subscriber forecasts are “looking risky,” the company’s linear TV outlook is deteriorating and the $2.5B of hard cost reductions are now in consensus estimates.

A week later, Macquarie downgraded Disney to Neutral from Outperform with a price target of $103, down from $125. Linear networks are deteriorating, direct-to-consumer is a “work in progress” with the biggest decision and execution on ESPN still ahead, and Parks growth is slowing, the analyst told investors. As such, the firm believes the shares will be “range-bound for now.” Progress is underway in Disney’s streaming service as operating losses abate, but prior guidance of DTC attaining profitability during fiscal 2024 “may now be off the table,” Macquarie said.

On June 29, KeyBanc downgraded Disney to Sector Weight from Overweight without a price target. The company’s Domestic Parks expectations “appear high” and its direct-to-consumer subscriber growth has stalled, the analyst told investors. The firm says Disney has failed to differentiate its streaming churn versus peers while ESPN moving to streaming is “materially harder” than thought. KeyBanc’s survey work shows low willingness for consumers to pay for ESPN. The firm worries the 2024 financial setup for Disney “feels a lot like 2023.” As such, it prefers to step aside, acknowledging meaningful uncertainty, and waiting for further catalysts, “as buying the dip has been a losing trade.”

On July 25, Atlantic Equities downgraded Disney to Underweight from Neutral with a price target of $76, down from $113. The analyst sees a “negative tipping point” in linear TV advertising, which the firm estimates will shave almost $1B off 2026 forecast operating income at Disney. In addition, the popularity of the company’s key Marvel, Star Wars and Pixar franchises “have seen a degradation in performance,” the analyst told investors. This is all coupled with a pullback in general entertainment content spend, which Atlantic believes will impact Disney’s direct-to-consumer subscriber growth.

Meanwhile, in a note published in late June, Needham noted that the tone of incoming calls from investors regarding the stock had shifted “distinctly negative” over the past several weeks as sentiment has further deteriorated since CFO Christine McCarthy left. While the company has cut 3% of its workforce, investors are “wary” about buying the stock before understanding the management’s growth plan, the analyst stated at that time.

CONSENSUS: In terms of overall results for the third quarter, analysts are calling for Disney to report total revenue of $22.5B. The consensus Q3 earnings forecast stands at 95c per share, down from where it stood 90 days ago at $1.29 per share. For the September-end quarter, analysts’ consensus currently calls for revenue of $21.58B and for the “House of Mouse” to post a profit of 76c per share, according to data from Refinitiv.

SENTIMENT: Click here to check out recent Media Buzz Sentiment on Disney as measured by TipRanks.