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May 17, 2005

Disney Story Intact Following Strong Quarterly Earnings

Disney (DIS) reported strong quarterly earnings earlier this month and the follow-up conference call confirmed operating trends remain excellent across the entire company. The shares sold off a bit when the earnings were reported but have since rallied to their highest level since late April as analysts had favorable commentary and raised earnings estimates for 2005 and 2006. Fundamentals are very strong at DIS and if the company just hits its numbers over the next few quarters, the stock has upside into the low $30s.....

During the company's conference call, DIS provided no detailed guidance made many individual references to current quarter trends and all were very positive. Here are some examples:

These tidbits suggested that management was at least confirming third-quarter EPS estimates of 38 cents, up 22% vs. a year ago and giving the go ahead to analysts to slightly raise their estimates.

The call began with broad overviews provided by both Michael Eisner and Bob Iger. Eisner emphasized the company's global opportunities and noted that the company has recently completed a major investment phase and is now reaping the rewards. He mentioned big expansions at the themes parks, newly launched cable networks, new programming at cable and broadcast networks, and the development of the live stage business. This struck me as a good way to spin the DIS story: The company responded to problems and made good decisions and is now gaining operating leverage as revenues rise against waning investment spending.

Iger's comments closely paralleled Eisner's but he spoke more about how technology offered Disney opportunities in wireless and broadband Internet. He also stressed India as the next frontier now that China has been seeded for the opening of Hong Kong Disneyland.

There really were very few issues that came up on the call. Management refused to comment specifically on DVD sales of The Incredibles but said that trends are fine. Free cash flow was way down vs. a year ago but the company had a good explanation for higher-than-expected receivables and lower-than-expected payables related to timing factors involved with Incredibles. However, management admitted that free cash would be down slightly against very high levels a year ago. Share buybacks will continue but could be lowered if an acquisition opportunity arose. There was no commitment to sell Radio but I thought the commentary implied a good price could see it sold. There were no comments on a new Pixar deal. If Pixar goes elsewhere, it will be a near-term negative for the shares.

In summary, DIS has a strong fundamental outlook that should extend through the current fiscal year ending in September and continue through 2006. Growth rates will moderate some as fundamentals move from turnaround to sustained growth. I don't think a moderation in the growth rate will prevent the shares from moving higher. DIS trades at a premium to its big-cap entertainment conglomerate peers. The premium is deserved and won't get in the way of upside for the shares as long as operating trends remain firm.

Posted by Steve Birenberg at May 17, 2005 02:39 PM in DIS