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Can Disney’s (DIS) earnings provide a much-needed catalyst for the House of Mouse?
 

Key takeaways

• Disney shares have underperformed this year and need a catalyst
• Sales growth is slowing down and earnings are forecast to fall for the fourth consecutive quarter
• CEO Bob Iger has agreed to stay on for another two years
• M&A may be a theme as it seeks to possibly sell TV channels and find partners for ESPN+
• Streaming arm expected to remain in the red for the next year
• Disney+ to lose more subscribers
• Theme parks and resorts still bright spot, but also suffering from a slowdown
   

Disney earnings date

Disney will report third-quarter earnings after US markets close on Wednesday, August 9. A live audio webcast will start on the same day at 1630 ET (1330 PT).
 

Disney earnings consensus

Third-quarter revenue is forecast to rise 4.7% from last year to $22.5 billion and adjusted EPS is seen declining 7.9% to $1.00. 

Other key figures to look out for in the quarter include:

• Media & Entertainment is forecast to report flat revenue of $14.35 billion and a 22.6% drop in operating profit to $1.06 billion.
• Its Direct-to-Consumer unit that homes its streaming operations are expected to book an operating loss of $777.3 million
• Disney+ is predicted to lose 3.2 million subs sequentially and end the period at 155.1 million.
• Parks, Experiences & Products is set to report an 11.5% year-on-year rise in revenue to $8.24 billion and a 9.7% increase in operating income to $3.46 billion.
   

Disney earnings preview

CEO Bob Iger has recently agreed to stay on for another two years after being brought back in late 2022 to put the magic back into Disney – a job that is yet to be achieved considering he has some big tasks to complete in that time, including finding a successor.

Disney shares, which linger not far above their 2023-lows and trade a discount to its rivals and the wider market, are in the doldrums and the House of Mouse is in need of a catalyst. We have seen the brakes come down on growth over the past year and this is set to be the fourth consecutive quarter of lower earnings.

This has been driven by a mixture of headwinds but most of Iger’s troubles stem from its media and entertainment arm that homes its array of film studios, TV channels, and streaming services.

Media reports suggest Iger has recently brought back two former executives as advisers, with the primary task to help sort out its TV networks and ESPN+. We could see Disney offload TV channels if it can find a buyer willing to pay the right price. Its linear TV segment is expected to report a 6.1% fall in revenue this quarter, marking the fourth successive period of declines as the advertising market remains soft.

As far as Iger is concerned, content is still king but the way it is distributed has fundamentally changed as consumers continue to cut the cable, with the eruption in streaming having encouraged consumers to keep cutting the cable while severely denting attendance at cinemas. Disney is also thought to be looking for a partner to help drive ESPN+ forward.

That means M&A could be a theme this week as Disney, providing a way for the company to cut costs and free up cash to accelerate investment in its core operations.

That is all the more significant considering Disney is also under pressure to turn its streaming services profitable. Its direct-to-consumer division has booked over $11 billion worth of operating losses since it started to break out of the segment in 2020! Disney is on the right path, but Wall Street believes its direct-to-consumer unit is still about a year away from escaping the red. Any signs this will be achieved earlier would be welcomed by the markets. Below is a chart outlining DTC losses since launch, with consensus estimates from Bloomberg highlighted in the box to show the anticipated path to profitability:

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The fact Disney+ has been losing subscribers this year is making it more difficult. It lost 6.4 million subs is the first half of the financial year, partly because of an exodus in India after losing the cricket rights and losses in North America, and analysts think it lost another 3.2 million in the third quarter. ESPN+ and Hulu continue grow. Disney’s pain in streaming is all the more difficult for markets to tolerate considering Netflix is already profitable and is adding subscribers this year.

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The other, more profitable half of Disney is its theme park, resorts, and cruises that benefited from the pent-up demand left when lockdown restrictions were ended. Although sales are still rising at a double-digit rate, partly thanks to Disney’s strong pricing power, this is expected to be the slowest growth in two years as comparatives start to normalize.
 

Where next for DIS stock?

The setup for Disney shares looks interesting ahead of the results, with the update holding the potential to cause a breakout.

Disney shares have been setting a series of lower highs since hitting 2023 highs back in February, tracked by the falling trendline that continues to provide resistance. Meanwhile, we have seen $85 provide a reliable floor over the past three weeks. We are waiting for it to break out of this range.

Any move above the falling trendline would also allow it to recapture the 50-day moving average for the first time in three months and would open the door to a potentially larger move toward $94. A break below the current floor risks seeing it flirt with the eight-year low we saw in late 2022 of $84 before entering new unknown territory.

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Dow Jones analysis: Where next?

Disney is a member of the Dow Jones and carries a 1.6% weight in the index, making it the one to watch ahead of the results.

Our Wall Street index, which is based on the Dow Jones, has found it more difficult to find higher ground since closing at a 17-month high of 35,600 at the start of this month, but the bulls remain in control for now. The index us holding above the upper-half of the parallel channel that can be traced back to March and the 78.6% retracement appears to be providing some support. All three moving averages are trending higher and the RSI is in bullish territory to provide scope for the index to climb to new highs and test the upper-end of the channel.

The retracement line should provide a safety net if the mid-way point of the channel fails to hold but any slip below here risks seeing it slip below 35,500.

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