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May 04, 2005

Improved Ratings At ABC Help Disney's TV Stations

Last week, I initiated a position in Walt Disney (DIS) based on the company's strong operating momentum and identifiable catalysts. Among the several catalysts I mentioned was the upfront market, the launch of Hong Kong Disneyland in the fall, 3Q EPS to be reported on May 11 (better than expected with rising guidance and estimates to follow?), better results at the Florida theme park due to foreign travel and a weak dollar, and margin expansion at the theme parks. One thing I failed to mention was the potential benefit ABC's owned-and-operated TV stations would get from the improved ratings at the ABC Network in primetime....

Disney owns ten television stations that broadcast the ABC network including stations in the largest markets of New York, Los Angeles, Chicago, Philadelphia, San Franscisco, and Houston. These stations produce operating cash flow of about $275 million annually. Cash flow should gain a direct benefit from better ABC network ratings because local ad inventory sold in primetime will be at higher prices and because better lead-ins to local newscasts could cause those ratings and ad rates to rise. Since ABC stations generally have highly rated newscasts in the major markets, Disney should be able to monetize any ratings boost fairly easily.

Given estimates for slightly over $6 billion in operating cash flow in the fiscal year ending in September 2005, a marginal benefit at the TV station level can't move the needle much. However, the investment thesis at Disney is that virtually all of its businesses have operating momentum at the same time. Broad based strength can produce positive surprises -- a few million here, a few million there, and suddenly you've got an extra penny in EPS, better guidance and rising estimates. Disney is one of the few places in large-cap media where the possibility of this scenario exists.

Posted by Steve Birenberg at May 4, 2005 10:34 AM