Disney earnings on deck as Iger deals with dizzying array of media sector challenges

Walt Disney DIS shares edged higher in pre-market trading Wednesday ahead of the media and entertainment giant's fourth quarter earnings slated for after the closing bell. 

Disney's sprawling empire, which includes everything from cruise ships to sports content licensing, will be condensed into three new reporting segments in today's earnings report, with ESPN sitting largely in a stand-alone division for the first time in the company's history.

The re-alignment comes amid the broader turnaround effort under interim CEO Bob Iger, who faces multiple challenges in boosting group profits as he fends-off pressures from activist investors while adapting to intense competition in the streaming and content landscape powered by rapid consumer spending changes. 

The complexity of its business, the reporting restructuring as well as the departure of veteran finance chief Christine McCarthy earlier this year were likely the catalysts in bringing in PepsiCo PEP CFO Hugh Johnston, who will join the group later this month.

On a headline basis, analysts see Disney posting fourth quarter earnings of 70 cents per share, up from the 30 cents per share reported over the same period last year, with revenues rising 6% to around $21.35 billion.

"Since returning as CEO at the end of last year, Iger has had to contend with a range of issues including the writers' and actors' on strike, a contentious negotiation with Charter over their network carriage dispute, and the threats from an activist investor," said Paul Fanelli, media and telecoms analyst at Gabelli Funds in a recent client note. 

"With activist investor Nelson Peltz increasing his stake to a massive $2.5 billion in a public boardroom saga, is Iger's magic wand losing its spark?," he added. 

Related: Disney stock higher as billionaire Nelson Peltz adds firepower to board-seat battle

Disney's sports segment, which includes ESPN, ESPN+, content licensing and India's Star channel, has seen profits fall by around 20% over the nine months ending in July, to just under $1.5 billion, thanks in part to a surge in content costs, narrowing margins and muted ad sales. Segment revenues were $13.2 billion.

Analysts see the division reporting $8.2 billion in revenues and around $852.2 million in operating profits. 

Entertainment headwinds

Earlier this summer, Iger said Disney would work toward finding a content partner for ESPN that would help offset the ongoing decline, and agreed terms with Penn Entertainment that would see the gambling group pay $1.5 billion over 10 years, as well as an equity kicker, in exchange for the use of brand rights, promotions and other forms of cooperation as it relaunches under a new name: ESPN Bet.

Disney's entertainment segment, which now includes all of its streaming, IP and content that isn't sports-related, has revenues of $31 billion and operating income of $1.2 billion over the first nine months of Disney's fiscal year, but is losing subscribers and faces a difficult ad environment heading into 2024 and beyond.

Like many of its rivals, Disney is looking to boost subscription prices, while offering lower-cost options that include advertising, in order to generate firmer group profits. 

Disney is also looking to solidify its position in streaming by purchasing the remaining 33% stake in Hulu that it doesn't already own from media rival Comcast CMCSA.

Related: Disney investors impatient with Iger effort; 'Mickey on a Diet'

The deal price pegs the so-called 'floor value' of Hulu at $27.5 billion, with Disney paying at least $8.6 billion to Comcasts' NBCU division by December 1 as part of a previously-agreed arrangement in 2019.

The division is expected to post fourth quarter revenues of 11.73 billion and profits of $691.1 million. 

Disney, which also suggested over the summer that it could sell some of its traditional television assets is also reportedly fielding interest from media giant Byron Allen, who launched a bid to buy its ABC television network, as well as other linear cable assets, for around $10 billion in mid September.

Dallas-based Nexstar Media is also reportedly interested in the ABC network assets, following comments from CEO Tom Carter at a Bank of America media conference.

The power of Parks

The bulk of Disney's earnings power, however, is likely to come from its Parks and Experiences division, which delivered around $8.3 billion in revenues, or just over a third of the overall total, in the three months ending in June.

Earlier this fall, Disney said it would allocate around $60 billion in new investments over the next ten years to "expand and enhance" the division, which generated $2.425 billion in operating profits, an 11% increase from last year, offsetting the  18% decline in the Media and Entertainment Distribution segment.

"Near term, we believe Domestic Parks per caps and attendance will be weak, and Cruises (not disclosed) should be the key domestic driver," said KeyBanc Capital Markets analyst Brandon Nispel. "But while the growth and cash generation of Experiences is strong relatively, Disney's $60 billion 10-year investment in this business will make cash flow growth challenging."

Disney shares were marked 0.37% higher in pre-market trading to indicate an opening bell price of $84.90 each, a move that would leave the stock down more than 17.8% for the past six months. 

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