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February 09, 2007

Disney: Strong 1Q07 Earnings Support Higher Target Price

Disney (DIS) reported much better than expected 1Q07 earnings with EPS coming in at 50 cents against a consensus estimate of 39 cents. Revenues were also better than expected at $9.7 billion vs. an estimate of $9.5 billion. I don’t see any unusual items that would impact the 50 cent figure so this looks like a large and clean beat.

At the segment level, revue upside came from Broadcasting and Studio Entertainment with modest upside at Cable Networks. At the operating income level, DIS came in just short of $2 billion, over $300 million ahead of analyst estimates. Cable Networks and Studio Entertainment provided all of the upside.

DIS no longer provides guidance and Q&A on the conference call was a little short because the company is hosting an analyst meeting starting tonight. However, it was clear from the tone of the call that management is very confident in the FY07 outlook. Given the big beat and confident commentary, estimates will definitely be going up by "at least" the amount of the beat. DIS looks poised to produce another year of double digit EPS and operating income growth, something that many on Wall Street, including some bulls were worried might not happen. 1Q07 results provide for a little more upside in DIS shares but maybe as importantly they dramatically reduce the risk that 2007 turns out the be the year that the DIS story ends. The toughest quarterly comps are coming in the next two quarters so reaction in the shares might be limited but DIS is likely to continue beating conservative estimates providing upside momentum to the shares. The $40 level is now clearly within reach.

Here are brief segment comments....

Broadcasting: Performed as expected with ABC doing well and the TV stations getting a boost from political advertising. Of great significance, management noted that current scatter market pricing is 10% above upfront. This should lead to estimate increases in this segment.

Cable Networks: Confounding some skeptics, ESPN continues to rock. Adjusted for a $60 million revenue deferral that has no costs attached, operating income would have risen about 10% despite the huge increase in amortization of the Monday Night Football NFL contract. Management didn’t really change their tune of calling for "average" annual growth of double digits for ESPN but the commentary suggested this would probably be reached in 2007 despite many naysayers. The NASCAR contract starts amortizing in 2007 so keep an eye on the ratings for races.

Theme Parks: Another solid quarter. Against very tough comparisons revenues rose 4% and operating income rose 6%. Attendance trends are very good in Florida driven by domestic visitors. This is another division where estimates have been cautious and the good start to the year should lead to increases in estimates for the remaining quarters.

Studio Entertainment: A huge quarter by any measure driven by DVD sales of Pirates, Cars, and Little Mermaid. Revenue rose 23 %, beating estimates by over $100 million. The flow through to operating income was superb as EBITA rose by over 200%. At $600 million, EBITDA beat estimates by $200 million. Management noted that Little Mermaid is a fully amortized title and sold very well. Also, Pirates and Cars sold at least as many units as hoped and management is not concerned about an unusual level of returns from major retailers. This is probably the last strong comparison for the Studio for several quarters.

Consumer Products: Strong merchandise licensing for Cars and Pirates could not overcome the loss of guaranteed revenue, weak video game sales, and high video game development costs. Revenues fell 8% and EBITDA fell 13%, both coming in below analyst estimates. This is DIS smallest division so the shortfall is not too much of a concern. Comparisons should improve as the year goes on.

Posted by Steve Birenberg at February 9, 2007 10:15 AM in DIS