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September 29, 2006

Near-Term Good News For Disney

Yesterday, in the post immediately below, I mentioned that Disney (DIS), News Corp (NWS, NWS.a), and Time Warner (TWX) were all trading at 52 week highs. Departing from the doom and gloom that Dominates most discussion of media stocks, I laid out some big picture thoughts that might be driving the bullish action in the stocks. However, there are actually some short-term developments that are helping each company. In particular, DIS continues to enjoy a string of good news that has driven the stock for the past couple of years.....

Most recently, DIS announced yesterday that ESPN was shutting down MVNO mobile phone business. Losses have run above expectations as subscriber growth was negligible, marketing plans were re-tuned, and phone subsidies increased. The company was guiding to $100 million in losses form this venture in FY06. I read the closing of this venture, even if it results in a significant write-off as bullish. First, analyst estimates contained anywhere from $50 to $100 million in additional losses from this venture in 2007. Jessica Reif of Merrill Lynch was using $100 million and raised her 2007 earnings estimate by 2 cents after the announcement. The big debate that has dominated the DIS discussion was whether the company could continue its multiyear string of double digit EPS growth in 2007. Elimination of the ESPN MVNO losses is a nice boost for the bulls.

Second, and more importantly, new CEO Bob Iger has promised on the last quarterly conference call that the company would take a hard look at this venture and not losses get out of control. The fact that he was willing to admit a mistake and take his lumps is a sign of real leadership. Iger has gotten high marks since taking over for Michael Eisner, receiving credit for bold moves like the Pixar acquisition and aggressive exploitation of DIS content on developing distribution platforms like the web and iTunes. I’ve always felt stocks of companies with well respected CEOs deserved a higher valuation. IN media, I think that is more the case given that the CEOs are often flamboyant and egotistical. Media CEOs are first name guys – Sumner, Rupert, Mel. I see Iger as deserving of respect for his effectiveness, not his high profile and that helps to support a premium multiple for DIS.

The final piece of recent good news for DIS is a strong start for ABC and ESPN in the fall TV season. ABC won the first full week of the new season as its risky move of Grey’s Anatomy to Thursday night opposite perennial #1 show CSI paid big dividends, with the ABC show easily winning the competition. ABC also won the first Sunday night of the season, meaning that the two most viewed nights of TV both went to the DIS-owned network. Following a lousy summer and less progress that expected last season, these signs of renewed momentum at ABC are a very welcome developments with meaningful financial upside given the high operating leverage in the network TV business model.

ESPN also is seeing early returns on its swap form Sunday night to Monday night football. Ratings for the first few Monday night games have been stellar, up more than 20% vs. Sunday ratings a year ago. ESPN also benefits as pre and post game shows advertising slots are more valuable. Additionally, ABC has much lower costs on Monday. So it looks as though the huge increase in rights fees incurred by the switch to Monday nights might pay off. At worst, it doesn’t appear that ESPN will be taking the bath that some predicted on its new NFL deal.

DIS should enjoy strong earnings growth the next several quarters driven by box office success for Pirates, Cars, and a few other films and the follow up DVD sales at Christmas. I am with the bulls who believe that 2007 will shape up as another strong growth year for DIS, further cementing the company as the premier large cap media stock.

Posted by Steve Birenberg at September 29, 2006 04:54 PM in DIS