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Walt Disney Q3 earnings: Parks recovery in question amid cost-of-living crisis


ArvinIG

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Walt Disney earnings see traders focus on parks demand as the cost-of-living crisis starts to bite. With the majority of stocks outperforming the earnings season, could Wednesday provide a buying opportunity?

Disney
Source: Bloomberg
 
 

When will Walt Disney report their latest earnings?

Walt Disney report their earnings for their fiscal third-quarter (Q3) post market on Wednesday 10 August 2022.

What should traders look out for?

Disney have come under pressure over the course of the past year, with the shift out of high growth names hurting the big hitters in the US. For many, the concern over spending habits in an environment of higher inflation and lower disposable income does bring question marks for the parks segment of the business.

However, reports of strong visitor numbers at their parks does bring the potential for outperformance thanks to growing subscription numbers for their Disney+ streaming service. With the stock having lost 47% from the record highs of 2021, traders will be paying close attention to whether the company have the ability to weather the storm as the economy weathers a recession.

Interestingly, Q2 saw revenues from the Media and Entertainment Distribution segment contract, with parks expanding to account for a greater proportion of the overall company. While Covid-19 pandemy understandably dampened demand for the physical experiences in 2020, we have seen parks revenue up to up to 33% of total income (from Covid-19 low of 9%).

However, while parks do provide greater margins (26% vs 14%), there will be questions over how much they can growth given that revenues are roughly back up to pre-Covid-19 pandemic levels. The key here is whether we can see stability for Parks revenues, and growth for Media and Entertainment as we push through a tough period for businesses.

Walt Disney earnings – what to expect

Revenue – $20.96 billion vs $17.02 billion (Q3 2021), and $20.27 billion (Q2 2022).
Earnings per share (EPS) – $0.97 vs $0.80 (Q3 2021) and $1.08 (Q2 2022).

Walt Disney earnings – valuation and broker ratings

Analysts are largely positive for Walt Disney shares given the declines seen over the past year, with zero ‘sell’ recommendations heading into Wednesday’s earnings. Instead, out of 32 analysts, there are 25 ‘strong buy’ or ‘buy’ recommendations, and seven ‘hold’ recommendations.

 

Disney analysts table
Source: Eikon

Walt Disney shares – technical analysis

The weekly Walt Disney chart highlights the dramatic decline seen over the course of the past year, with the price falling back down towards that crucial $79.65 support zone. That level marks the bottom for both 2020 and 2016 lows, with a break below that threshold required to truly bring the long-term trajectory of the stock into question. Instead, we are seeing the price rally back up towards the important $112.84 swing high. A push above that level should form that basis of a potential bottom for the pair.

Utilising the Bollinger Band also brings greater importance to this level of resistance, with the middle band coming into play for the first time six months. The previous occasion saw the price return lower, thus highlighting how important a break through this $112.84 would be. It also highlights the potential for a bearish turn from here to continue the bearish trend should earnings disappoint.

 

Weekly Disney chart
Source: ProRealTime

What is the wider earnings backdrop?

Thus far we have seen an undeniably positive earnings season, with many companies managing to overshoot market expectations. That is important as we move into the back end of this period, with the wider market gains reflecting the pricing in of better-than-expected numbers from a majority of firms.

That can mean Disney have a tough time on Wednesday, with outperformance potentially already priced in, and underperformance thus bringing a more volatile market response. Below we can see the breakdown of earnings and revenues from the 87% of S&P 500 firms that have already reported. Notably, we are yet to see any sector without a majority of firms outperforming on both earnings and revenues.

 

US 500 earnings summary chart
Source: Eikon

Joshua Mahony | Senior Market Analyst, London
09 August 2022

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