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May 08, 2007

Disney: Slowing Growth, High Expectations Raise The Bar

Margin expansion should propel Disney (DIS) to another quarter of greater than 10% growth in operating income when it reports 2Q07 results after the close on Tuesday. Revenue and EPS growth are only projected to grow in the low single digits due to tough comparisons. DIS has produced significant positive surprises in each of the last four quarters and estimates have been rising slightly so the expectation bar is high. With 3Q also facing a tough comp and slower growth than in recent quarters, DIS probably needs to report a positive surprise and indicate 3Q is shaping up well for the shares to move higher. An as expected quarter could lead to a sell the news reaction.

DIS is being very tightly and adeptly managed and has great momentum in its content divisions. I think the company will produce a quarter that satisfies investors. I am long and expect to remain long following the quarter looking for an exit closer to the $40 level.

Current consensus estimates call for EPS of 38 cents on revenues of $8.13 billion. A year ago EPS was 37 cents on revenues of $8.02 billion so growth is expected be just 1-2% in the headline numbers. Margin expansion at almost all division will produce better operating income growth which is the key measurement for investors....

Broadcasting will likely show down revenues due the carriage of the Super Bowl a year ago. Excluding the Super Bowl revenues will be up about 5%. Revenues and margins will benefit from the shift of Grey's Anatomy to Thursday night and should overcome generally softer ratings. Scatter market ad pricing has been strong which will also help the quarter. Losses from the Disney branded wireless MVNO will pressure the quarter.

Cable will produce another good quarter driven by the ESPN juggernaught. Revenues should grow about 7% with operating income up about 10%. Elimination of losses from the ESPN branded MVNO will boost profits. Revenue deferrals will again be an issue but will just delay revenue and profit recognition until 2H07 when football and NASCAR programming airs.

Theme Parks face another tough comparison due to the 50th anniversary celebration a year ago in California. Trends in Florida have been strong, however, and should be enough to produce an uptick on the revenue and operating income lines with an assist form cost controls. Parks in Hong Kong and Paris will continue to produce good revenue growth but sizable losses.

Studio Entertainment faces a tough comparison and is expected to see slightly lower revenue than a year ago. A smaller movie slate and cost cutting should lead to margin expansion and a gain in operating income. Last year saw very strong DVD sales and international box office from Chronicles of Narnia. This year's films performed better than expected and it is possible that DVD sales of Cars and Pirates 2 carried over into the March quarter.

Consumer Products is the smallest at DIS and will produce flat results. The winding down of minimum guaranteed revenues will be offset by the start of royalties on formerly owned Disney stores. Higher spending in the video game unit could pressure profits.

Posted by Steve Birenberg at May 8, 2007 10:29 AM in DIS