Disney (DIS) Earnings: Can ESPN Make A Turnaround In Q3?

Media giant – The Walt Disney Company (NYSE:DIS) – is slated to report third-quarter fiscal 2017 results after the closing bell on Aug 8. In the previous quarter, the company had registered a positive earnings surprise of 3.5%. Moreover, the company has surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with an average earnings beat of 1.1%. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The question lingering in investors’ minds now is whether Disney will be able to post positive earnings surprise in the quarter to be reported. The current Zacks Consensus Estimate for the quarter under review is pegged at $1.53, down over 5% year over year. We note that the Zacks Consensus Estimate has declined by 4 cents in the past 30 days. Analysts polled by Zacks expect revenues of $14,442 million, up over 1% from the year-ago quarter. Recent downtrend seen in the Zacks Consensus Estimate indicates that analysts are less constructive about the stock’s upbeat performance.

We noted that the stock has underperformed the industry in the past three months. The company’s shares have decreased 2.5%, wider than the industry’s decline of 1.2%.

Factors at Play

We remain concerned about ESPN’s performance and decline in rating at the company’s youth-focused Disney Channel which might hurt third-quarter fiscal 2017 results.

Falling subscriber base and higher programming costs at ESPN are the major concerns. Fresh NBA agreement and increase in contractual rate for NFL programming drove the overall programming cost higher for ESPN in the past. Further, most media companies are failing to cope with "cord cutting" as consumers are unwilling to pay for large bundles of channels. In the third quarter, the company expects programming costs to increase 8% year over year due to $600 million in incremental costs linked with the first year of its fresh NBA contract. Out of $600 million expenses $400 million are expected to occur in the third quarter.

Disney had stated that mobile apps will play an important role in the future of media and ESPN is on the way of taking the advantage of the trend with wide range of apps. Moreover, to bring ESPN back on growth track the company has inked a deal with video streaming, data analytics as well as commerce management company BAMTech.

However, sturdy movie business owing to blockbuster releases and strong performance of its Parks & Resorts division continue to act as catalysts. Ever since the acquisition of Pixar in 2006, Disney has released many blockbusters under Pixar, Marvel, Lucasfilm and Disney Animation banners.

Disney’s Parks & Resorts division is anticipated to report another impressive quarter. In second-quarter fiscal 2017, the segment reported revenues of $4,299 million, up 9% from the year-ago period. Further, it is focused on deploying capital towards expansion of the Parks and Resorts business, consequently, increasing market share as well as creating long-term growth opportunities.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Disney is likely to beat earnings estimates this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. Disney has an Earnings ESP of 0.00% as both the Zacks Consensus Estimate and the Most Accurate Estimate are pegged at $1.53.

Disney currently carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks with Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Nexstar Media Group, Inc. (NASDAQ:NXST) has an Earnings ESP of +1.09% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Six Flags Entertainment Corporation (NYSE:SIX) has an Earnings ESP of + 0.54% and a Zacks Rank #3.

Eldorado Resorts, Inc. (NASDAQ:ERI) has an Earnings ESP of +12% and a Zacks Rank #3.

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