FedEx Misses Expectations; ESPN+ Hits 1 Million Subscribers

In this segment from Motley Fool Money, host Chris Hill and senior analysts Jason Moser, Matt Argersinger, and Ron Gross first consider the reasons FedEx (NYSE: FDX) shares lost ground after its fiscal first-quarter profits missed expectations. Margins may have shrunk a bit, and Trump's China tariffs are impacting its top and bottom lines in a minor way, but as a business, the company is performing well. The real costs are that it's trying to pay its employees (and managers) better.

Then, they discuss ESPN+, which Disney (NYSE: DIS) launched five months ago. It's already up to 1 million subscriptions, which is excellent news, considering how important (and troubled) the ESPN brand has been for the entertainment giant. The real question is where Disney's heading in the streaming media universe. On the one hand, it plans to launch multiple services, and on the other, it will soon own a majority stake in Hulu. How will all of this fit together?

A full transcript follows the video.

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This video was recorded on Sept. 21 , 2018.

Chris Hill: Shares of FedEx falling a bit this week after first quarter profits came in lower than expected. Ron, part of this is, FedEx is paying its employees more. That seems like a good thing for FedEx in the long run, and that seems like a bad reason to sell this stock.

Ron Gross: Yeah, I have no problem with that. It was two things -- higher bonuses from management and wage increases for hourly workers. Management, eh, OK, I won't begrudge them a few bucks. I'm fine with the hourly increases for their workers. I think that will bode well down the road.

I think what hit the stock a little bit here is the whole tariff thing. So far, 10% of FedEx's business in China has been affected by the tariffs. FedEx gets about 2% of their overall revenue from that region. So, I think there's some fear there, but I think it's overblown. The tariffs, I assume they're going to work themselves out. I think about it like I think about currency. I don't know how to predict it. I don't know where it's going to go. But I assume it's going to work its way out.

Overall, I think it's a strong report. Revenue up 11%. Earnings up 38%, which was actually worse than expected, but pretty good on the heels of a lower tax rate, which everyone has obviously benefited from. They raised guidance. Shares are only 14X earnings. I thought the report was great.

Hill: Back in April, Disney launched its ESPN+ streaming service with a price tag of $5 a month. This week, Disney announced it now has one million subscribers. Obviously, they're looking for more than that, Matty. But this is a pretty good start, five months in.

Matt Argersinger: I think it is, I think a lot of the investing community was pretty skeptical about this when they first announced it in 2017, and certainly after they debuted it just a few months ago. But, hitting a million's huge. I think Bob Iger on the last conference call hinted at that. He said conversions from free trials are going well, subscription numbers were stronger than expected.

I think this is good news. It makes investors feel a little more confident about what's happening next year, which is the Disney app, which I think is the bigger platform, the bigger subscription service they're going to launch. It comes on the heels of ending the distribution agreement they have with Netflix.

I'm still a little bit worried. I'm glad to see the traction, but I worry still that there's just too many choices now in front of consumers. It's nice that people seem to be paying up for this incremental ESPN content. But I feel like Hulu is still out there. They're going to get a majority stake in that. I feel like that's their best bet. That's the best platform for them to compete with the Netflixes and Amazons, YouTubes of the world. I imagine that eventually, a lot of that Disney content is going to flow there, as well.

Hill: That's one thing to keep in mind, though. When they get that access to Hulu, do you think on some level, they are building these apps with Hulu as the backup plan? Maybe not so much with ESPN+, but certainly with the movie streaming app. In the same way that there's original content on ESPN+, Katie Nolan's show and other things like that, there's also original content in the works for the movie streaming service they've got next year.

Argersinger: That's right. You put it great, Hulu is the backup plan. They're trying out these separate brands. ESPN Sports, Disney content, Star Wars, Marvel, all that. Hulu probably feels a little too broad, almost like a cable service. I know, Jason, that's how you started to think about Hulu Live and things like that. Maybe you're right. I think, if these apps don't gain a lot of traction, all that stuff ends up on Hulu anyway.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN and Walt Disney. Matthew Argersinger owns shares of AMZN, NFLX, and Walt Disney. Ron Gross owns shares of AMZN and Walt Disney. The Motley Fool owns shares of and recommends AMZN, NFLX, and Walt Disney. The Motley Fool recommends FedEx. The Motley Fool has a disclosure policy.