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November 10, 2006
Disney Numbers Are Good But Sell The News Wins Out
Disney (DIS) reported strong 4Q06 earnings. EPS of 36 cents compared to a rising 33 cent consensus and revenues of $8.8 billion were ahead of the consensus estimate of $8.7 billion. Segment level results were as good as or better than expected across the board with particular strength in Studio Entertainment and Theme Parks.
Despite the better than expected results I think DIS shares may trade slightly lower for two reasons. First, given the strong run-up and rising estimates, a positive surprise was expected. Thus, a sell the news setup is in place. Second, on the conference call, I thought the companies comments on swing factors for FY07 (DIS does not provide guidance) will leave the debate open as to whether the company can extend its string of double digit growth in operating income. I think the commentary gave slightly more ammunition to those who think the streak will be snapped than those who think it will continue (I think it will continue)....
Don’t read that as unusually negative. DIS management was confident and spoke of many opportunities for growth in 2007. Furthermore, the current consensus calls for less than 10% growth.
Coming off this quarter, I still like DIS and think it is one the best positioned large cap media stocks. The stock just might be due for a rest while the growth I expect in 2007 is given a chance to reveal itself.
Cable Networks was a star again as ESPN continues to grind out growth and the Disney Channel continues to monetize its ratings success. Revenues rose 16% and operating income rose 2%. Margins expanded due to the recognition of deferred revenue and lower marketing expenses. Advertising revenue growth appeared to be satisfactory based on comments on the conference call. Looking ahead, the company said that growth would be "generally consitent" with their promise that ESPN would average double digit operating income growth. Tough comparisons await due to increased rights fees for NASCAR and Monday Night Football. Thus, I'd take this comment as being favorable relative to many analysts who fear 2007 will be a loser growth year for ESPN.
Broadcasting revenues rose just 1% with operating income declining 40% off a small base of just $48 million. Management said that ABC performed well but rising costs for the Disney mobile phone service held back margins. For 2007, ABC appears to be in very good shape due to strong ratings, a good upfront and very strong scatter market advertising in response to this year's ratings success. I think Broadcasting represents a positive swing factor relative to current estimates.
Theme Parks had another good quarter, especially in light of very tough attendance comparisons. Revenues rose 8%, while operating income rose 28%. The closely watched margin expansion continued at the domestic parks helped by higher guest spending that offset flat attendance growth at the domestic parks. Operating income also got a boost from a full quarter of operations at Hong Kong Disneyland vs. mostly pre-opening costs a year ago. December quarter attendance trends look flat but that is encouraging performance against record attendance a year ago. I sense that management is more optimistic than the street about Theme Park growth in 2007.
Studio Entertainment easily beat estimates with revenues of $2 billion and operating income of $214 million against estimates of $1.85 billion and $170 million, respectively. The positive surprise emanated from the big success for Pirates and Cars at the box office and better margins for home video due to a favorable mix of titles and reduced marketing expenses. The Studio should perform exceptionally well in 1Q07 when the December quarter gets the Pirates and Cars DVDs. Comparisons toughen starting 4Q07 but the timing of Pirates 3 will help comparisons in 3Q07. Management noted that TV syndication might be down in 2007 vs. a very strong 2006.
Consumer Products did very well in merchandising due to Cars and Pirates but higher spending on developing the video games unit held back margins. Revenues slightly exceeded expectations, rising 9% but operating income grew just 1%. In 2007, these trends should continue with an incremental $30 million in spending at the video games unit offset by Pirates 2, Pirates, Cars, and the next Pixar film, Ratatouille, which is due out next June.
I have a few follow-up questions concerning the swing factors in 2007. I'll post in Market Insight if the answers offer additional insights.
Don’t read that as unusually negative. DIS management was confident and spoke of many opportunities for growth in 2007. Furthermore, the current consensus calls for less than 10% growth.
Coming off this quarter, I still like DIS and think it is one the best positioned large cap media stocks. The stock just might be due for a rest while the growth I expect in 2007 is given a chance to reveal itself.
Cable Networks was a star again as ESPN continues to grind out growth and the Disney Channel continues to monetize its ratings success. Revenues rose 16% and operating income rose 2%. Margins expanded due to the recognition of deferred revenue and lower marketing expenses. Advertising revenue growth appeared to be satisfactory based on comments on the conference call. Looking ahead, the company said that growth would be "generally consitent" with their promise that ESPN would average double digit operating income growth. Tough comparisons await due to increased rights fees for NASCAR and Monday Night Football. Thus, I'd take this comment as being favorable relative to many analysts who fear 2007 will be a loser growth year for ESPN.
Broadcasting revenues rose just 1% with operating income declining 40% off a small base of just $48 million. Management said that ABC performed well but rising costs for the Disney mobile phone service held back margins. For 2007, ABC appears to be in very good shape due to strong ratings, a good upfront and very strong scatter market advertising in response to this year's ratings success. I think Broadcasting represents a positive swing factor relative to current estimates.
Theme Parks had another good quarter, especially in light of very tough attendance comparisons. Revenues rose 8%, while operating income rose 28%. The closely watched margin expansion continued at the domestic parks helped by higher guest spending that offset flat attendance growth at the domestic parks. Operating income also got a boost from a full quarter of operations at Hong Kong Disneyland vs. mostly pre-opening costs a year ago. December quarter attendance trends look flat but that is encouraging performance against record attendance a year ago. I sense that management is more optimistic than the street about Theme Park growth in 2007.
Studio Entertainment easily beat estimates with revenues of $2 billion and operating income of $214 million against estimates of $1.85 billion and $170 million, respectively. The positive surprise emanated from the big success for Pirates and Cars at the box office and better margins for home video due to a favorable mix of titles and reduced marketing expenses. The Studio should perform exceptionally well in 1Q07 when the December quarter gets the Pirates and Cars DVDs. Comparisons toughen starting 4Q07 but the timing of Pirates 3 will help comparisons in 3Q07. Management noted that TV syndication might be down in 2007 vs. a very strong 2006.
Consumer Products did very well in merchandising due to Cars and Pirates but higher spending on developing the video games unit held back margins. Revenues slightly exceeded expectations, rising 9% but operating income grew just 1%. In 2007, these trends should continue with an incremental $30 million in spending at the video games unit offset by Pirates 2, Pirates, Cars, and the next Pixar film, Ratatouille, which is due out next June.
I have a few follow-up questions concerning the swing factors in 2007. I'll post again if the answers offer additional insights.
Posted by Steve Birenberg at November 10, 2006 01:19 PM in DIS
