The Walt Disney Co. earnings report will be a Wakanda-sized celebration, but the excitement is already being overshadowed by a giant, purple god that could be even bigger.
When Disney reports second-quarter earnings after the bell Tuesday, the success of Marvel’s “Black Panther” will be a huge focus, as the blockbuster film opened about halfway through the quarter and added hundreds of millions to Disney’s movie revenue and profit. The first Marvel movie with an African-American lead has become one of the top 10 box-office successes of all time, and is No. 3 for domestic returns, behind only “Star Wars: The Force Awakens” and “Avatar."
It appears “Black Panther” will not stay in its current spots on the all-time lists for long, however, as purple-hued Marvel villain Thanos takes center stage. Marvel’s “Avengers: Infinity War” has become the fastest movie to surpass $1 billion in box-office returns, taking less than two weeks to hit that number, and early returns made Marvel the fastest studio to hit $1 billion in box office in a year in history, according to Forbes. There is still another Marvel movie scheduled to premiere this year as well, “Ant-Man and the Wasp” in July.
The success is helping to push expectations for Disney’s studio business higher, as the company continues to profit from its acquisitions of Marvel, “Star Wars” studio Lucasfilm and Pixar. Analysts have added about $100 million to their quarterly forecasts for that segment of Disney’s business since “Black Panther” came out in February, pushing the total to $2.19 billion.
“This demonstrates Disney’s continued ability to create leading franchises through quality [intellectual property] and excellent execution.” Macquarie analysts wrote in an earnings preview in which they pushed their theatrical revenue estimate to $888 million from $817 million.
The Macquarie analysts believe that Black Panther realized about $376 million in profit in the quarter, based on an estimate of $300 million in production and marketing costs. Disney is expected to report operating profit of $3.75 billion for the quarter, according to FactSet, which would make “Black Panther” worth about 10% of Disney’s total.
Analysts have also added to Disney’s expected earnings thanks to Marvel’s success. While the average expectations have moved higher by just a penny a share since the end of February, UBS analysts added 10 cents to their second-quarter estimate, which was due to the outperformance of “Black Panther.” UBS has a buy rating and $128 price target on the stock.
Any reticence to push estimates higher could be stemming from disappointment elsewhere, namely from Disney’s other main movie opening of the quarter. “A Wrinkle in Time” opened to a disappointing $33.1 million (playing second fiddle on its first weekend to “Black Panther,” which was already in its fourth), stressed Daniel Salmon of BMO Capital Markets, who has a Market Perform rating and $100 price target on the stock.
Disney will also premiere a new “Star Wars” movie this quarter, with “Solo: A Star Wars Story” premiering on May 25, and Pixar’s “The Incredibles 2” scheduled to launch on June 15.
What to expect
Earnings: Analysts on average expect Disney to report earnings of $1.70 a share, according to FactSet, up from $1.50 a share a year ago. Contributors at Estimize, which crowdsources estimates from analysts, fund managers and academics, expect profit of $1.73 a share on average.
Revenue: Analysts expect total revenue of $14.1 billion on average, FactSet reports, up from $13.3 billion a year ago. Estimize contributors on average predict sales of $14.3 billion.
Disney revenue has historically broken down into four segments (more on that below), which the company calls Media Networks, Parks & Resorts, Studio Entertainment and Consumer Products & Interactive. On average, analysts expect sales of $6.09 billion for media networks, with $4.22 billion coming from cable networks and $1.86 billion from broadcast; $4.69 billion from Parks & Resorts; $2.19 billion for Studio Entertainment; and $1.14 billion for Consumer Products & Interactive.
Stock movement: Disney stock has fallen after three of the past four quarterly earnings reports, and shares are down 4.7% so far in 2018 and 8.5% in the past 12 months. The Dow Jones Industrial Average , which counts Disney as a component, is down 1.9% this year and up 15.8% in the past 12 months.
What analysts are saying
Analysts are excited to hear about ESPN, a big focus of investors for the past couple of years as the sports family of cable networks has been losing subscribers who are cutting the cable cord. With this update, Disney’s overall streaming strategy could also be discussed. Disney launched a new direct-to-consumer ESPN service late in its fiscal second quarter, part of a strategy that will also eventually include a Disney streaming-media service expected to launch after the company’s contract with Netflix Inc. ends.
As part of this new strategy, Disney will reorganize its historical segments to produce a new division focused on direct-to-consumer and international offerings, replacing the Consumer Products & Interactive segment, which will be split up and absorbed mostly in Parks & Resorts. Disney expects to start reporting the new segments by the beginning of its next fiscal year.
While the reorganization will not be in place for Tuesday’s report, expect Disney to offer a lot of color on the segment in the wake of the ESPN+ launch, as analysts and investors have lots of questions and expectations.
“We feel that Disney’s broader shift to DTC/OTT is correctly the top point of investor focus right now,” BMO analysts wrote in a note on April 25, in which they bumped Disney’s rating to market perform from underperform.
“Strategizing around Disney’s overall OTT strategy beyond just ESPN+ is becoming increasingly important given the growing proportion of Disney viewership that is happening on alternative distribution platforms," wrote Macquarie analysts, who have an outperform rating on the shares with a $125 price target.
The effort is likely to have a negative effect in the short-term, as Disney spends to build the services, but is expected to begin showing fruit in a couple of years.
“Overall, we expect the Disney-branded service to be a powerful consumer offering that enhances the Disney ecosystem and brand, but notable content investments and lost licensing fees over the next couple of years are likely to drive losses before the service ramps to roughly break-even by F2021 with ~13m subscribers,” JP Morgan analysts wrote in an April 30 note devoted entirely to Disney’s streaming plans. “Meanwhile, we expect ESPN+ to have a very modest financial benefit by F2020, although given the complementary nature of the offering, we do not expect it to be a meaningful financial driver but rather become an important technology and digital infrastructure platform for the company as the media landscape becomes increasingly on-demand.”
In its theme parks business, Disney increased admission prices in February, which should lead to discussions of early results and expectations for long-term effects. Consumer products is expected to get a boost from branded tie-ins with the Marvel movies and other properties.
Acquisitions will also be a big topic, as Disney’s $52.4 billion bid for parts of 21st Century Fox is becoming even more complicated. Comcast Corp. topped Fox’s bid for Sky PLC after bidding more for the Fox assets than Disney but losing out on regulatory concerns, and Comcast is reportedly considering making another play for the assets Disney is in line to receive. That situation may have gotten even more complicated after a report Monday evening suggested Comcast may be prepping for another attempt at the Fox assets Disney has agreed to acquire, so expect plenty of questions Tuesday in Disney’s conference call.
Of 25 analysts tracked by FactSet, 15 have the equivalent of a buy rating on the stock, and 10 have a hold rating, with none suggesting the stock is a sell. The average price target is $121.89, suggesting an 18.9% premium to Monday’s closing price.