The Walt Disney Company’s DIS fabulous run over the past couple of years seems to have hit a roadblock. Shares of this media giant got hammered nearly 11% over the last two sessions following a mixed third-quarter performance and a subdued outlook for its largest and crucial division – Media Networks (comprises Cable Network and Broadcasting operations).
What Went Wrong with Disney?
Although the company beat estimates for the bottom line, the top line came in a tad below expectations. Management cautioned that lack of hedges at favorable rates against forex volatility will squeeze out $500 million from its fiscal 2016 operating income.
Moreover, the loss of subscribers at ESPN will reduce Cable Network’s affiliate revenues, which along with currency volatility will bring down the Cable Network’s operating income growth rate during the fiscal 2013 to fiscal 2016 period to mid single-digits as against the high single-digit range projected earlier.
This was enough to send investors into a tizzy, resulting in a massive selloff. Media Networks division has been the company’s biggest contributor to its profit. In fiscal 2014, the division contributed 43.3% to revenues and 56.3% to total segment operating income.
Of late, the unit’s primary cash cow ESPN has come under a lot of pressure as the Pay TV landscape continues to alter owing to migration of subscribers to online TV. Falling subscriptions will have a telling effect on the network’s ad revenues. ESPN reported 3% decline in revenues for the third quarter of fiscal 2015.
Although CEO Iger mounted a powerful defense for ESPN stating that loss of subscribers was moderate and ESPN continues to be a dominant TV channel across the U.S., absence of data on lost subscribers and a subsequent cautious outlook disappointed investors.
Is the Media Sector Feeling Jitters?
Not just Disney, but other media giants like Twenty-First Century Fox, Inc. FOXA, Viacom, Inc. VIAB, CBS Corp. CBS and Time Warner Inc. TWX were all trading in the red after their quarterly results announcements over the last two days. Viacom lost 14% of its market cap yesterday after a disappointing third quarter performance while 21st Century Fox, CBS Corp. and Time Warner are down 6.4%, 3.6% and 9.7%, respectively, after announcing results on Aug 5.
This spelled disaster for the Media sector. As per The Wall Street Journal report, at least $35 billion in market cap across seven major media houses was erased this week. Moreover, CNN Money touted this week as the worst one for the sector in the last 7 years.
As per several analysts, weakness has persisted in the TV ad market for some time now and number of cord cutters has been on a rise but the effect of the same wasn’t felt so strongly by the traditional media companies as it was seen in this quarter. Analysts feel that the correction in the markets, though a bit of an overreaction, was much required to focus on the imminent threats faced by the traditional media houses as online TV service providers like Netflix, Hulu and Amazon Prime Instant up their ante.
What’s in Store for the Future?
Going forward, things don’t appear to be in the sector’s favor. The Pay TV landscape will continue to drastically alter the playing field with the advent of unbundling/skinny bundling. Increasing cord cutters mean that advertising dollars will move away from TV to various digital platforms.
The loss of subscribers will eventually reflect on affiliate revenues as this is also calculated on a per-subscriber basis. Affiliate fees are earned from cable & satellite companies for carriage rights of the stations. Loss of advertising and affiliate revenues will indeed mar the top line of the media companies. To battle the odds, the companies are trying to expand into digital services and overhaul their existing revenue models. This, however, remains a time-consuming affair.
Then What’s the Alternative?
With the Media sector looking less investment friendly, we suggest shifting your attention toward blue-chip stocks that look promising based on their Zacks Rank, price movement and earnings surprise history.
Here we present four such stocks for your consideration:
Amazon.com Inc. AMZN is a no brainer. This Zacks Rank #1 (Strong Buy) stock has surged roughly 70% in the past year. The company has outperformed the Zacks Consensus Estimate in the trailing four quarters with an average beat of 72.9%. The long-term growth rate of the company stands at 33.5% while earnings growth rates for 2015 and 2016 are at a whopping 366.5% and 200.1%, respectively. Further, the Zacks Consensus Estimate has been showing a massive uptrend over the past 30 days.
Apple Inc. AAPL, one of the world’s most renowned tech companies, remains a solid bet too. This Zacks Rank #2 (Buy) stock has surged roughly 23.9% in the past one year. The company has delivered positive earnings surprises in the trailing four quarters with an average beat of 9%. The long-term growth rate of the company stands at 14.1% while earnings growth rates for fiscal 2015 and fiscal 2016 are at 41.6% and 6.1%, respectively. The estimate revision story has been impressive for this stock as well.
NIKE, Inc. NKE is global leader in athletic footwear, apparel, equipment and sports-related accessories. If we look at the metrics, this Zacks Rank #1 stock has witnessed a 52.5% growth in its share price while beating the Zacks Consensus Estimate in the trailing four quarters with an average beat of 13.1%. The long-term growth rates of the company stands at 13.2% while earnings growth for both fiscal 2016 and 2017 stand at 12.7%. This stock is also no less to witness favorable estimate revision.
With a Zacks Rank #2 (Buy) and 41.1% growth in share price over the past one year, pharmaceutical giant, Eli Lilly and Company LLY is another stock that’s worth betting on. This Indianapolis-based company has beaten the Zacks Consensus Estimate in the trailing four quarters with an average beat of 9.4%. The long-term growth rate of the company stands at 13.7% while earnings growth rates for 2015 and 2016 stand at 17.7% and 9.5%, respectively. Favorable estimate revision is a positive for this stock as well.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment