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July 31, 2007

Disney 3Q07 Earnings Preview

Disney (DIS) faces a tough comparison when it reports its 3Q07. Projected EPS of 55 cents are up just 4% vs. a year ago. Analysts have long expected this to be the toughest comparison so it should not come as a surprise. Given ongoing concerns that DIS' best financial performance is behind it, the report and conference call could be significant to resolving the debate.

DIS has been growing at a double digit rate for several years and the stock price has responded accordingly. Financial performance in all divisions has been excellent and current profitability levels are at all-time highs pretty much across the board. No one argues that DIS' growth will not slow. Rather it is the magnitude of slowing where the debate occurs. I am in the bull camp, believing that double digit growth can continue. The stock is acting like the growth string is near the end. A good report with confident talk about the future – DIS does not provide guidance – should be greeted well but any shortfall or signs that the rest of 2007 will remain sluggish probably means the end of the bull run in DIS shares for the time being.

For 3Q07, DIS is expected to report EPS of 55 cents on revenues of $9.04 billion. Revenue growth is projected at 6%. Operating income is the key metric for DIS and it is projected to grow at or slightly ahead of revenues indicating flat to slightly higher margins.

As with most of the major media stocks, it is segment level results where the action takes place. Here is a brief preview of each segment...

Broadcasting should show revenue growth of 7% and a big 45% increase in operating income. Strong scatter pricing and the strength of ABC's primetime schedule last TV season provide the upside. In addition, costs should be down as the company had less programming development this year. DIS also had a good quarter for TV syndication which is normally highly profitable.

Cable Networks should show double digit revenue growth but just low to mid-single digit operating income growth. Revenue deferrals and somewhat soft ratings at EPSN and a tough comp vs. last year when the High School Musical DVD was shipped will hold back operating income. The Disney Channel should continue its strong growth.

Theme Parks should offer more of the same with mid-single digit revenue growth accompanied by margin expansion driving double digit operating income growth. DIS still faces tough attendance comps at its theme parks due to 2006 promotions but this segment has consistently beat estimates this year despite those tough comps.

Studio Entertainment is projected to show negative comparisons. Box office looks good but the lack of a big selling DVD title against the initial shipments of The Chronicles of Narnia a year ago creates a very difficult hurdle. Furthermore, most of the marketing expenses for Ratatouille will fall in 3Q even though the film was not launched until June 29th, creating an expense-revenue mismatch. One positive to come out of this segment this quarter should be reassuring words about the profitability of Ratatouille and Pirates of the Caribbean: At World's End both of which performed well but under some aggressive estimates.

Consumer Products was a bright spot last quarter and another good quarter is expected. Licensing revenue related to Cars, the Pirates movies, and Ratatouille should continue to grow strongly. Rising expenses as DIS develops its video game division will be a negative offset.

Posted by Steve Birenberg at July 31, 2007 02:47 PM in DIS