What Segment Should Disney’s Investors Be Worried About?

Walt Disney Co (NYSE: DIS) has released Q2 earnings, and the company reported a rare miss, with EPS coming in at 1.36 vs consensus estimates of $1.40 per share. Revenue in the second quarter came in at $2.1 billion.

Despite delivered double-digit growth in adjusted EPS for the 11th consecutive quarter, Q2 marked the first time Disney had failed to meet analysts’ expectations in over two years.

The increased advent of cord cutting has weighed on Disney’s stock in recent months, primarily affecting its media networks portion of the business, Disney’s largest segment. With more consumers moving toward streaming services instead of cable, lower revenue from ESPN has been a primary concern for investors.

Disney and Verizon Communications Inc. (NYSE: VZ) has just settled its lawsuit filed regarding the telecom giants “skinny bundle” packages that gave customers an option to decline having ESPN in their cable package. ESPN is one of the most expensive networks in cable.

The company is addressing this issue, currently in talks with several streaming services to combat this concern. “We have been in talks with several entities, all of which have expressed interest in having ESPN on their network,” said CEO Bob Iger. The chief executive’s succession plan is also a concern, as his contract expires in June 2018, and he does not plan to extend his contract past that date.

The lack of growth in the media networks business played a big role in missing estimates, as the segment declined less than 1 percent. It will remain to be seen if ESPN can enter the streaming world in a way that the network can see revenue growth.

Other Segments

Disney cruise line was a bright spot for the company, which had its best year ever in 2015. The company has a strong competitive advantage in the cruise industry, and has two new ships planned for 2021 and 2023.

Parks and resorts revenue was up 4 percent in the quarter, as the company prepares for its Shanghai Disney Resort set to open on June 16. “We are looking at park expansion opportunities in Hong Kong and Tokyo,” added Iger.

Disney stock is reacting to the miss, where the stock slid over 6 percent following Tuesday’s closing bell.