By Jack Hough

Walt Disney is slated to report quarterly financial results on Wednesday morning. It could use some upbeat news after reaching a pair of milestones that you might call dwarf-related, and decidedly grumpy.

      The first is that its live-action   Snow White remake just topped $200 million in worldwide box office receipts. Hold the applause: Industry reports say it cost about $250 million to make, suggesting that it could need $500 million or more to break even, but after six weeks in theaters, ticket sales are down to a trickle. It's a poison apple, in other words. Disney quickly halted Tangled, a live-action remake based on the Rapunzel story. 

The other milestone involves Netflix dwarfing Disney -- even more. In 2018, the streaming pioneer became the most valuable media company when it topped Disney in stock market capitalization, at about $152 billion. Since then, Disney's value has increased only a little -- owing to a higher share count, not a rising price. Netflix has rocketed higher, to nearly $500 billion, which makes it now worth about three Disneys.

For theater redemption, Disney will look to a superhero team-up with good reviews, called Thunderbolts, which opened on May 2. For stock resuscitation, a well-received earnings report would be a start. But McDonald's just reported its biggest same-store sales decline since the Covid-19 lockdown. If consumers are feeling too cautious for McNuggets, where do they stand on theme park expenditures that can rival in-state college tuition? How about Disney+? It made its debut in the U.S. in 2019 at $6.99 without ads, and is now up to $9.99 with ads, or $16.99 without. It ranks third in subscribers behind Netflix and Amazon.com's video kick-in for Prime subscribers.

Consensus estimates have revenue for Disney's second fiscal quarter through March rising 4.6%, to $23.1 billion; operating profit growing 2.8% to just under $4 billion; and earnings per share dipping 1.6%, to $1.19. UBS analyst John Hodulik expects "resilient" results and is slightly more optimistic than the Street on profits.

Disney's most important segment is Parks, which contributes about half of operating profit. Your reporter, who has been out of the theme park game since succumbing to an even more inflationary pursuit called youth travel sports, has noticed slightly larger discounts than usual for visits to Disney World in Florida. Will he combine a late-summer tournament trip to the sweltering South with a pop-in at the Magic Kingdom, or that new Universal park, or will he instead just stand for six hours in front of the nearest pizza oven while wearing a backpack and scrolling ride wait times? Each has its charms, but more important to Disney's bookings last quarter is that the Parks segment includes cruises, and a new ship called the Treasure set sail in December. That should be enough to support modest growth.

The entertainment business could see higher streaming profits, as Disney+ price increases last fall offset subscription losses. Traditional television remains in decline, but ESPN could get support from the emergence of skinny sports bundles offered by cable carriers. Films will benefit from moderate success for the latest Captain America release and easy comparisons with last year.

Guidance will matter most. Last month, UBS' Hodulik took his full-year earnings estimates for Disney down by 1.3% for this year and 5.2% for next year. He kept his Buy rating but cut his price target to $105 from $130. The stock recently traded around $91. Note that a higher percentage of analysts are bullish on Disney than on Netflix, just as in 2018. Time will tell whether that's fairy-tale thinking. Netflix goes for 42 times the forward earnings consensus. Disney is at 15.6 times -- even lower than when parks were shut down during the Covid-19 pandemic.

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Let's switch to the broad stock market, which is generously offering a second chance to panic. On April 2, President Donald Trump detailed his tariff rates, sending stocks tumbling. But he later put those rates on hold for 90 days to soothe investors and allow for trade negotiations. The S&P 500 index has since sashayed back to where it started, leaving it at 21.5 times earnings. If you held on during the downturn, well done. If you wished at the low point that you had made some changes to your portfolio mix, now's your chance.

After all, tariff unpause day is July 8. What if negotiations falter, or consumers pull back on spending, or overseas investors turn less keen on U.S. assets? What if U.S. investors change their minds again about whether there's a Trump put, or a Fed put? What if a Trump put-down leads a put-upon Fed to put off its put and stay put? Just putting it out there.

What to buy for resilience? BofA Securities argues that large-cap value stocks are less vulnerable to stagflation risks than the overall market. The Russell 1000 Value index has 20 percentage points more exposure to earnings that come from nondiscretionary goods and services than its growth counterpart. An iShares exchange-traded fund that tracks the index, ticker IWD, recently traded at 16.7 times this year's projected earnings, versus 27 times for its growth counterpart, ticker IWF.

Bryant VanCronkhite, manager of the Allspring Special Mid Cap Value fund, agrees on the appeal of value stocks but makes a case for mid-caps. He calls them "big enough to not be pushed around" as much as small-caps by tariffs, because of their diversified operations, but also "not so big where you become a proxy for the broader economy."

One of VanCronkhite's favorite stocks now is Labcorp Holdings, 15 times earnings, owing to its "defensive cash flow characteristics" and its runway for growth as hospitals have come to view in-house testing operations as hard-to-run "annoyances." He likes home builder D.R. Horton, 11 times earnings, which has underperformed of late amid higher mortgage rates and a slowdown in demand, but which nonetheless stands to profit long term from an acute housing shortage. And VanCronkhite likes Graphic Packaging, 10 times earnings, which sold off sharply this past week on disappointing guidance. It's pruning its portfolio of consumer packaging while building a new plant, making for weak volumes and elevated spending, but VanCronkhite believes that the changes will bolster free cash flow down the road.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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May 02, 2025 14:12 ET (18:12 GMT)

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