Disney (DIS) F2Q16: Another Reset And It's Not Over Yet - Bernstein

Bernstein analyst, Todd Juenger, believes that shares of Disney (NYSE: DIS) are likely to be caught in a trading range because " few entertainment companies have the durability, diversification, and raw IP-creating power and library of Disney" but estimates took another leg down and could face additional compression in the future. No change to Market Perform rating and $110 PT recognizing that there is likely to be volatility near term.

3 reasons the street won't like Disney earnings:

1) a big miss versus expectations at Consumer Products

2) revenue slowdown at Parks

3) lingering uncertainty over domestic affiliate fees (which Disney refused to disclose)

3 reasons why its not that bad:

1) Consumer Products has a sell-side forecasting problem, not a business problem

2) some of Parks revenue slowdown was purposeful yield management (as evidenced by margins)

3) upon close inspection and triangulation, there wasn't a material change in the quarter to the trajectory of affiliate fees

The key concern: affiliate fees, showed no material changes in the quarter. However, 2H16 affiliate fees are likely to decelerate another notch due to expected step-downs from the TWC/CHTR merger.

Parks revenue decelerated (the and corresponding margin improvement) more from management choice, and a few idiosyncratic factors, than from a deceleration in end market demand. Parks revenue growth has decelerated each year for the past four years – but margins have also improved each year. That said, the item most likely to catch investors eyes is the flat domestic attendance (up in California, down in Orlando). Much of the explanation for "flat" attendance was a management choice to focus on yield/profitability rather than volume. If Disney can raise price and lower quantity, they can conceivably earn just as much revenue, higher margins, all while providing guests with a better experience (less crowding).

The huge Consumer Products miss was, for the second quarter in a row, the result of poor forecasting not weak operating performance. However, sell-side forecasts are systematically too high, and must come down, which matters to the valuation of the stock.

For an analyst ratings summary and ratings history on Walt Disney click here. For more ratings news on Walt Disney click here.

Shares of Walt Disney closed at $106.60 yesterday.

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