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November 08, 2006

Another Strong Quarter On Tap For Disney But 07 Is What Matters

Disney (DIS) is expected to report strong 4Q06 earnings to wrap up its fourth consecutive year of double digit EPS growth. EPS are expected at 33 cents on revenues of $8.69 billion. The EPS comparison would represent growth of 43% against an easy comparison a year ago when $300 million in losses were recognized at Miramax.

The big debate over DIS shares concerns whether FY07, which started on 10/1/06, will continue the streak of double digit growth. Tougher comparisons at the movie studio, theme parks, ABC, and ESPN have many investors worried that growth at DIS will moderate. In fact, the current consensus EPS estimate of $1.70 for 2007 represents growth of just 7.6%. Consequently, on the conference call any comments about guidance or indications of how business is pacing for 2007 will be most likely to impact DIS shares in the near-term.

For the current quarter, growth should be broad based with each operating segment growing EBITDA by double digits. Growth at the studio will be strongest given the aforementioned easy comparison and the runaway success of the company's summer film slate led by Pirates of the Caribbean: Dead Man's Chest and Cars. ESPN is also expected to report a strong quarter as timing issues will shift about $85 million in revenues into the quarter. Consumer Products will benefit from spillover of merchandising from the box office success. Theme Parks will be driven by margin expansion as attendance was very strong a year ago in response to an effective marketing campaign built around the 50th Anniversary of Disneyland. Broadcasting should continue its turnaround led by good ratings performance and improved ad pricing at ABC. One thing that could distort results is the shift of Monday Night Football from ABC to ESPN....

Looking ahead of FY07, I remain optimistic that DIS will come through with another year of double digit growth. First, the company will benefit greatly from the December quarter release of DVDs for Pirates and Cars. Second, ABC is off to a great start this TV season which should lead to strengthening advertising sales. Third, ratings for Monday Night Football on ESPN have been very strong, likely above ratings guarantees. This should help offset the big increase in rights fees for the NFL contract and the new NASCAR contract. Fourth, DIS has made major changes at its movie studio, reducing and focusing the release slate and cutting jobs. The benefit in 2007 could be $100 million, or more than 1% of EBITDA growth.

There is no doubt that analysts are expecting these things to happen (of course, I formed my own thinking by learning from them – special props to Kathy Styponias at Prudential). However, estimates for 2007 have not gone up in the last 30 days. Therefore, I think if management signals through its commentary that 2007 is looking good, estimates could move up and DIS shares could make one more burst upward. Keep in mind that DIS has suspended providing specific guidance so the commentary on the call is what will matter.

DIS has reached my targets but since I think estimates are going up I am going to stick around a bit a longer. How much longer will definitely be influenced by what I learn after DIS reports.

Posted by Steve Birenberg at November 8, 2006 12:47 PM in DIS