Disney (DIS) stock is suffering a bit after-hours on Tuesday as the company reported a decline in earnings per share. Overall, the entertainment giant credited the quarter to the costs associated with the integration of Fox (FOX) assets, as well as the efforts to build up its streaming services. The potential of that area of the business far outweighs the quarterly miss on analysts' estimates. The integration of the upcoming Disney Plus, ESPN Plus, and Hulu bundle that Disney announced, could easily become the dominant player in streaming services.
The fiscal third quarter included a mix of overall sales gains, coupled with weaker profits from those revenues. Total revenues were $20.24 billion. That's a 33% increase year-over-year. Alas, operating income declined by 5% to $3.96 billion. Net income was another story. Net income from continuing operations declined by 51%, to $1.44 billion. On an earnings-per-share basis, earnings declined by 59% to 79 cents per diluted share, compared to $1.95 the year prior. Excluding items, earnings declined by 28% to $1.35 per diluted share.
More unsettling, free cash flow was negative $2.93 billion in the fiscal third quarter. Again, most of this is due to the costs of integrating the Fox assets into their business, as well as investments in things like the streaming services.
Media Network revenue increased 21% to $6.7 billion, while parks, experiences and products increased a slower 7% to $6.57 billion. The big area of growth for Disney is direct to consumer and international, where revenues are up over 100% to $3.8 billion, but this area of the business is a financial drag on earnings right now. The segment had an operating loss of $553 million. This came from Hulu consolidation, investment in ESPN Plus, and the pending start of Disney Plus.
So far this year, Disney has brought in $8 billion in box office revenues. That's the highest in the industry. Marvel, Pixar, and Disney have all had successful titles in theaters this year, but "Avengers: Endgame" was the biggest hit.
The strength of content, combined with the entry into streaming, is making a cocktail for future success. Disney makes the best content. The company has proven time and again that it knows how to dominate the box office. To that end, it's going to control the bulk of quality material for the streaming industry. It's streaming platforms of Disney Plus, Hulu, and ESPN Plus are going to create the ultimate tool for distributing their content to consumers.
Disney Plus is expected to launch on Nov. 12. The breaking news is the company plans to offer a bundled platform in which you can have Disney Plus, ESPN Plus, and ad-supported Hulu for $12.99 a month. That creates an extremely appealing price and value component against what Netflix (NFLX) is currently charging. Now that they have acquired the library of Fox content, I see them as the front-runner in terms of amount of content that can be offered to the consumer.
As noted in the management call, any Disney film that was released in 2019 will be immediately made available on Disney Plus once the theatrical and home entertainment windows close. Netflix used to be able to get their hands on these types of movies and shows. Now that Disney will evidently be hoarding most of the flicks for themselves, I see a real shift in current competition. Disney has proven itself as a content king, and now they're cutting out the middle man in terms of streaming.
The advent of ESPN Plus is also welcome. ESPN has certainly suffered on cable. If it can transform it into a streaming service that complements the cable channels, perhaps some life can be breathed back into the story there.
Looking forward, I think this pullback might offer a point for some accumulation. One definitely needs to be mindful of the broader market right now, as trade tensions are pressing volatility. That market volatility concerns me more than Disney's earnings miss. The company is laying the groundwork for an exciting new area of the business. I'd definitely consider some shares around $125, but I'm not sure we'll see that price. Overall, I rate Disney as a long term buy.
Disney is a holding in Jim Cramer's Action Alerts PLUS member club.