Disney stocks plummet after CEO Bob Iger warns profits will fall well below consensus expections this year

Disney shares plunged by 4.7% after CEO Bob Iger's warning about lower profits
this year for the House of Mouse
This has got to be one of the worst days on Wall Street for the Walt Disney Company, and it isn't even after a bad quarterly earnings call.

Disney CEO Bob Iger spoke at the Bank of America Merrill Lynch 2017 Media, Communications & Entertainment Conference in Beverly Hills, California today, and the markets didn't react well to what he said.

Iger warned that Disney's profits this year would be "roughly in line" with what Disney generated in fiscal year 2016, which sent stock plummeting by 4.7 percent at one point mid-day. The media stock was down by 4.4 percent at the end of the closing bell, dropping from a price of $101.58 to $97.06 per share.

Disney reported $5.72 in earnings per share (EPS) for fiscal 2016. The current Thomason Reuters estimate for fiscal 2017 EPS is $5.88. Thus EPS for 2017 will likely be short of Wall Street estimates by around $0.16 cents.


To try to deflect the the bad news of shareholder panic on Wall Street, Disney also announced at the same conference that all Marvel and Star Wars feature movies will be shown exclusively on Disney's new video streaming platform, starting in late 2019 when (and if) the service launches.

2017 has brought a lot of uncertainty over Disney's future
Investors, however, still didn't buy the rouse as they reacted instead to the disappointing earnings guidance set by Iger.

Shares of all top Hollywood media stocks fell sharply today on a new wave of concerns that the cord-cutting phenomenon is indeed accelerating amid continuing fallout from digital disruption.

Disney stock prices dropped below the $100 mark for the first time since December of 2016, trading 16 percent below its 52-week high mark.

The reaction to Iger's announcement today reflected deep skepticism about even the biggest media companies going it alone with direct-to-consumer streaming video services.


While many Disney supporters have cited HBO's and Showtime's success going "over-the-top" as a reason why Disney and ESPN might see similar results, it should be noted that those "premium" channels are not a part of the basic cable bundle that subscribers pay for as part of the package deal. You have to pay an additional "premium" fee on top of the monthly cable package to get those "premium" channels added on to your cable TV service.

Did Disney just kill its goose that laid the golden eggs by going over-the-top?
So it makes financial sense for many consumers to ditch cable and pay directly for those "premium" over-the-top apps to see HBO and Showtime without having to shell out hundreds of dollars a month, first, for the basic cable bundle first before paying for the premium upgrades. Consumers, therefore, save hundreds of dollars a month by buying the HBO and Showtime apps directly rather than getting them through their cable providers.

The situation for Disney, however, is not the same. ESPN and Disney's other cable television channels are all a part of the basic cable bundle, and Disney gets paid for being part of that cable TV basic bundle, whether or not you watch their cable channels or not.

It's the greatest business model ever—especially for ESPN—with a license to print free money without having to work much at all to actually get any viewers to justify the large carriage fees they charge to the cable subscribers. Unfortunately, that lucrative business model is quickly falling by the wayside with the phenomenon of "cord-cutting."


When Disney goes over-the-top with its content in its new video streaming services in 2018 and 2019, they will also begin cannibalizing their own cable bundle business, thus quickening their most profitable division's demise, and the fees they generate online will only be a fraction of the fees they have been able to get from the cable bundle.


One analyst estimates Disney will need to sign up a whopping 32 million subscribers online just to break even. HBO's wildly successful OTT service currently has only 4-5 million subscribers. Thus, the picture looks bleak for the House of Mouse.

    
Many analysts see similarities between the recent decline of the cable bundle and theatrical movie distribution business models of the studio and television businesses and the demise of the music recording business with digital disruption by Napster beginning in the early 2000s.

These are indeed very bad times at the Walt Disney Company
Since there is only one fiscal quarter left on the fiscal year (and we're well into that quarter), which is set to end on October 1st, less than a month away, the earnings warning by Iger implies that Disney's fourth quarters earnings will also most assuredly be disappointing. (Short sellers might want to mark the date on Disney's Q4 earnings call on November 7, 2017.)

Iger attributed the expected shortfall to a large number of adverse factors, including increased costs for NBA television broadcasting rights for ESPN, disappointing box office numbers at the movie theaters this year, costs related to buying a larger stake in BamTech, and decreased theme park attendance numbers in all Disney theme parks around the world.

Disney is already seeing a steep drop in business from Category 4 Hurricane Irma's expected landfall, which may hit Florida Sunday, with a number of cancelled bookings to its Orlando theme parks and three cancellations of cruises and other unexpected rerouting of Disney Cruise Line operations in Florida.


All in all, fiscal 2017 was not the best of times for the Walt Disney Company, but then again, neither was fiscal 2016. Thus, Disney has had two bad straight years of poor results which may indicate a trend for fiscal year 2018.

   

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