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November 09, 2007

Routinely Good Quarter for Disney

Disney reported 4Q07 EPS of 42 cents adjusted for a tax benefit compared to consensus of 41 cents. Revenues of $8.93 billion matched the $8.98 million consensus. Comparing the segment numbers to my spreadsheet shows a remarkable closeness. This is actually one the things I like about Disney: the company is very tightly managed and predictable (leaving aside the volatility in movie and TV production). Strong and consistent execution is especially valuable with concerns over consumer spending rising. It is also helpful to valuation of the shares. Disney trades inline with peers News Corporation and Viacom. I think the strength of management and the company's franchises are deserving of a premium valuation.

The quarter and management commentary will not do much to quell the debate over how fast Disney will grow in FY08. In general, management sounded confident about the December quarter with theme park attendance and occupancy trends looking up mid-single digits and scatter market advertising up "strong" double digits at ABC – I'd interpret that as over 20% --- and double digit at ESPN. The company has a good DVD lineup with Pirates 3, Ratatouille, and High School Musical 2.

The only issue I see in the 4Q report is the slight contraction in theme park margins....

....This is the first quarter since 3Q05 where margins did not expand at theme parks. This was the very first question in the conference call Q&A and as I suspected (and hoped), the explanation was the international parks as Hong Kong remains disappointing. Management stated that domestic theme park margins expanded again. To get to double digit growth in 2008, Disney will need theme park margin expansion. Attendance and spending trends in the December quarter provide a good start and I'll be looking to renewed margin expansion this quarter to firm up the outlook. On the conference call there were several questions about theme park visibility indicating that analysts aren't comfortable even though September quarter was good and December bookings are similar. The visibility issue will serve as fodder for Disney bears who will note that attendance could slump quickly and unexpectedly. Foreign visitation and upper middle class Americans who forgo Europe due to currency provide support, however.

I do not mean to be flippant or lazy but if you read my preview of the earnings, virtually all of the commentary on the segments is more or less repeated in the press release. So in brief…

ABC was flattish as weak ratings were offset by big advertising price increases. ESPN was great with underlying growth in advertising greater than 10% after the benefits of recognizing revenue deferrals and the ads in the new NASCAR telecasts. The studio was weak as expected due to Pirates 2 in the year ago 4Q while Pirates 3 this year was in 3Q. Consumer Products continues to benefit from Cars and Pirates merchandising and Hannah Montana and High School Musical. This is offset by increased spending on licensing development and video games. FY08 will see another step up in these spending categories which will be a modest headwind. Theme park comments are largely above but management noted that attendance grew 5%, spending per guest was up 2% and hotel occupancy was just over 90%.

Posted by Steve Birenberg at November 9, 2007 01:29 PM in DIS