Disney Earnings Preview: Spending Surge steals the show, but growth is growing ahead of it

* Reports Q4 2019 results on Thursday, November 7 after the close

* Revenue expectation: $ 19.29 billion

* EPS expectation: $ 0.95

For Walt Disney Company (NYSE 🙂 shareholders, the nice ride is probably over. The company has entered a phase where expenditure will increase and profit will be affected. That is what the House of Mouse could show when it releases its fiscal fourth quarter tonight.

Analysts predict, on average, a 36% decline in earnings per share compared to the same period a year ago. While revenue growth is still strong, around 35% on an annual basis, the big challenge for Disney is to quickly demonstrate that its streaming video product is a huge success that will quickly generate more cash flow for the company.

Disney's weekly price chart

Disney invests heavily to win back subscribers who decamped to streaming providers such as Netflix Inc (NASDAQ :). The entertainment giant had previously warned that 2019 would mark a difficult fiscal year because it is going through an internal transition after acquiring most of 21st Century Fox, and while the program is developing for its flagship Disney + service, scheduled for launch on November 12.

The company has priced a new bundle of streaming services at a surprisingly low rate of $ 12.99 per month, for a package with family programming, live sports and an extensive library of television programs. It said that the combined pricing for Disney +, ESPN + and Hulu will represent a discount of almost 30% compared to their individual prices.

But all this means higher costs and lower profitability in the coming quarters if the traditional Disney companies are not there to fill that gap quickly. In the third quarter, spending on films and TV shows for new online services resulted in a loss of $ 553 million in the direct-to-consumer division of Disney. That figure could go up to $ 900 million in the fourth quarter, told Christine McCarthy, Chief Financial Officer of Disney, analysts in the last profit call.

The service is likely to have between 60 million and 90 million subscribers by the end of fiscal 2024, the year the company expects to achieve profitability in this segment.

Disney shares coming under pressure

The chances of success are good for Disney's streaming service. Verizon Communications Inc (NYSE :), the second largest telecom operator in the US gave the Disney + service a big boost last month by offering its customers free access for a year.

The company's basic package costs $ 6.99 a month, about half as much as Netflix, and offers a library of movies and TV shows that appeal to every child – everything from "The Avengers" and "Star Wars "to" The Simpsons "" and "Toy Story. "

At this crucial moment in his Disney growth plan, CEO Bob Iger must ensure that the company's other growth engines – the hugely popular theme parks and the huge movie empire – are there to pick up the bar.

However, this did not happen in the last quarter, when profits at the company's domestic resorts fell, even after the opening of Star Wars: Galaxy & Edge at the Disneyland resort in Anaheim, California, and the releases from "Avengers: Endgame," The most profitable movie of all time, "Aladdin" and "Toy Story 4".

That is why Disney shares have not made an impression on investors in the past quarter. Since reaching a record high of $ 147.15 at the end of July, they have dropped nearly 11% to close at $ 131.27 yesterday.

Bottom Line

We are unlikely to see any positive surprises from Disney in a year when spending is going to be higher, as the company takes Fox assets on board and invests in the three direct-to-consumer products.

However, Disney is a powerful brand with a lot of growth momentum. It has competitively priced its streaming product, making it difficult for consumers to ignore its Disney + services, with rich content and lots of variety. For these reasons, any fall in Disney's stock after the Q4 report should be considered as a purchase option.

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