Does Comcast’s Theme Park Sales Drop Spell Trouble For Disney’s Q3?

Disney (NYSE:DIS) is expected to publish its Q3 FY’24 results in early August. We expect Disney’s revenues to come in at $23.2 billion for the quarter, slightly ahead of consensus estimates, marking an increase of about 3% compared to the last year. We expect earnings to stand at $1.19 per share, roughly in line with consensus and up from $1.03 in the year-ago period.  See our analysis of Disney Earnings Preview for an overview of how Disney’s revenues and earnings will likely trend for the quarter. So what are some of the trends that are likely to drive Disney’s results?

We expect Disney’s theme park business – which has been the company’s strongest performer post the pandemic – is likely to see its growth slow down over Q3. During Q2 FY’24, Parks and Experiences revenue grew by about 10% year-over-year to $8.4 billion, driven by Disney Cruise Line business and Disney World in the U.S. On the international side, Hong Kong Disneyland outperformed, driven by pent-up demand post the Covid-19 reopening and the new World of Frozen attraction. However, Disney’s management has indicated that it was seeing signs a moderation from peak post-Covid travel, indicating that these growth rates are not sustainable. In fact, Comcast (NASDAQ:CMCSA), which owns rival Universal theme parks, noted that it saw revenue from theme parks decline nearly 11% to $1.98 billion. Although this can be attributed in part to a lack of new attractions in Universal’s theme parks, the broader slowdown in post-Covid travel is also a factor.

Disney’s Entertainment business saw some headwinds over Q2, amid lower advertising and affiliate revenues. Overall sales for the segment declined 5% year-over-year to $9.8 billion and we could see headwinds over Q3 as well, amid a mixed economy and weak consumer spending. However, the theatrical business could see a bit of a boost from the Inside Out 2 animated movie, which has seen global sales of over $1 billion. Investors will also be closely watching the performance of Disney’s streaming business, which has faced headwinds of late due to mounting competition, the impact of price hikes, and the loss of rights to stream the popular Indian Premier League. Over the last quarter, overall sales of the direct-to-consumer streaming business rose by about 13% to $5.6 billion. Over the last quarter, the Disney+ Core subscribers rose by more than 6 million, with ARPU also seeing gains.

DIS stock has suffered a sharp decline of 50% from levels of $180 in early January 2021 to around $90 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. Notably, DIS stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -15% in 2021, -44% in 2022, and 4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that DIS underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DIS face a similar situation as it did in 2021, 2022,  and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

So is Disney stock undervalued in the current environment? Despite concerns in the streaming and media operations, we remain positive on Disney stock for a couple of reasons. Disney is looking to unlock more value by restructuring its business while cutting costs to bolster profitability. The company expects to meet or exceed its goal of cutting about $7.5 billion in expenses by the end of this fiscal, with earnings per share projected to grow at least 20% versus the last year. We value Disney stock at about $137 per share, which is about 50% ahead of the current market price. See our analysis of Disney’s valuation for a closer look at what’s driving our price estimate for Disney. Also see our analysis on Disney revenue for a closer look at the company’s key revenue streams and how they have been trending.

[1] Returns as of 7/25/2024
[2] Cumulative total returns since the end of 2016

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