Earnings Preview: Rising Costs could be Disney’s End Game in the Third Quarter

The Walt Disney Company (DIS) is lighting up cash registers across the globe with box office success. However, some roadside flares might be ready to burn up the companies bottom line. Rising costs could put a damper on DIS’ silver screen triumphs.

Disney will release their third-quarter financial results after the close of regular trading on August 6, 2019. Wall Street predicts earning-per-share (EPS) of $1.75 on $21.47 billion in sales.

The entertainment company has had a string of successful movies. The most successful of which is the Avengers: End Game, which has done more than $2 billion in sales since its release on April 24th. Toy Story 4 revenue is a touch under a billion at $960.40 million since June 19th. The Lion King scored $1.2 billion in less than a month (released July 17th) and Spider-Man: Far from Home pulled in $1.08 billion since July 3rd.

That’s an amazing run. As an analyst from Cohen put it, Disney has “crushed it.”

Our proprietary model forecasts sales of $22.5 billion and EPS of $1.79, both exceeding the street’s consensus outlooks.

Disney’s stock price has suffered a little profit taking since hitting its 52-week high in late July. It is bouncing along its 50-day moving average and will likely move sharply, one way or the other, after their quarterly profit checkup.

To the upside, the stock could rebound to $145 in afterhours trading. To the south, 136ish post EPS. Depending on the mood investors carry into he next few days, DIS could flirt with its 52-week high and breakout if traders cheer results. Should the reaction to Disney’s numbers be disappointment, then support around $135 could invite some buyers.

In the last five-years, the street’s response to the iconic company’s earnings has been muted.  Shares usually rise of fall less than 5% in the days surrounding the quarterly earnings announcement. It’s been even less volatile of late with the share price swaying no more than 2% either way in the last four quarters.

In what could be a warning sign for the third quarter, despite box office success, Disney’s costs jumped in the second quarter compared to the first quarter. Total Costs and Expenses rose to 77.28% of revenue during Q2; whereas, the line item accounted for 72.25% of revenue year-over-year. Cost of services played the part of the villain, rising to 48.03% of the topline versus 43.99% last year.

Minus an “Other Income” entry of $4.963 billion during the second quarter (it was just $41 million in Q1), net profits margins in the second quarter would have nosedived to just 3.55% of revenue versus 20.19% the quarter before. That’s nasty and unnerving heading into Tuesday’s announcement.

The Play: While Disney is crushing it at the box office, rising costs could crush the company’s bottom line. Considering Wall Street has yawned in the days around The Walt Disney Company’s earnings, investors might be wise to wait and see how the story plays out before entering the stock.