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May 10, 2006

Disney's Results Will Keep The Shares Moving Upward

Results from Disney (DIS) look awfully good to me. EPS came in at 37 cents against consensus of 31 cents. I only see a 1 cent benefit from a lower than expected tax rate so it looks like a clean beat to me. Revenues were $8.03 billion vs. consensus of $8.18 billion, yet despite the $150 million shortfall, operating income easily exceeded analyst estimates so margins were quite good. Estimates are headed higher and so are DIS shares. Northlake remains long DIS and I see no reason to exit anytime soon....

The revenue shortfall was primarily at the Studio but operating income at this division beat estimates by $40-50 million. Management attributed the better than expected profitability to continued box office strength for The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe, lower distribution costs at Miramax, and strong results in TV production and syndication. Make or break for the movie studio comes this summer with the June release of Pixar's Cars and the July release of Pirates of the Caribbean. Narnia DVD sales will prove a benefit in June quarter results before the profits form the summer releases flow through the financial statements. Management is "extremely encourage by how smooth the Pixar transition has been."

Revenues also fell a little short at Cable Networks but once again profitability exceeded expectations. The operating income comparison was again penalized by deferral of revenue at EPSN to 2H06 so look for a big boost in growth starting next quarter. Cost for the ESPN Mobile venture also depressed profits. Management admitted on the call that initial response was worse than expected and that they have redone the marketing, subsidies, and distribution. So far, they are sticking to the $130 million loss for the combined Disney and ESPN Mobile ventures.

The stars in the quarter were Broadcasting and Theme Parks. Broadcasting easily beat expectations for both revenue and operating income. Compared to analyst estimates, marginal profitability looks quite high. Strength occurred at both the TV stations and ABC. Management was very confident about ABC's growth outlook for next season and indicated that the network will grow revenue nicely" in the upfront.

Theme Parks also beat on revenue and operating income. Attendance trends related to the 50th anniversary were noted. Margin expansion continues and management is sticking to still more expansion as well as attendance growth even after the anniversary benefits wear off. The recent weakness in the dollar could help international visitor attendance.

Other commentary on the call included a willingness to use balance sheet strength for acquisitions (Univision?), confirmation that Pixar will be 10 cents dilutive in the next two quarters, affirmation of double digit EPS growth in 2006 even after the dilution, and extensive discussion of the company's array of web-based video initiatives (over 5 million downloads of video at iTunes).

I have long felt that DIS was headed to the low $30s on the basis of consistent double digit growth as all the divisions are in sync. The shares are offered at $30 in the after hours market as I type this. I think the stock can still work several bucks higher on the Cars and Pirates box office and the big pickup in growth forecast for the next two quarters. DIS blew away estimates in each of the last two quarters despite supposedly tough comparisons. Estimates are going higher and the stock will follow. Only a shortfall for the summer movies or another big acquisition seem to be risk factors in the near-term. Northlake remains long DIS and I expect the shares to be further rewarded for outstanding financial performance and a clear content focused strategy that is looking ahead to digital delivery.

Posted by Steve Birenberg at May 10, 2006 02:02 PM in DIS