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February 04, 2008

Disney Earnings Preview: Slower Growth But Looking For A Positive Surprise

Disney is expected to report its weakest growth quarter in several years but I do think investors should interpret it as the end of Disney's multiyear run of superior financial results. Tough comparisons and the challenges of a weakening consumer are driving the slower growth but there is a good chance Disney will beat estimates which will remind investors that the company is coping quite well and deserves a higher valuation.

For its fiscal first quarter ending December 31st, Disney is expected to report EPs of 52% on revenues of $10.04 billion. These figures represent EPS growth of 6% and revenue growth of 3%. Operating income which is the most closely watched financial metric at Disney is projected to grow just 3%.

These figures understate the health of Disney's business as 2007 ended because a 20% decline in profits at the company's Studio Entertainment segments is dragging down results. Each of the company's other segments including Broadcasting, Cable Networks, Theme Parks, and Consumer Products should enjoy double digit growth in operating income in the quarter.

A couple of things to keep your eye on in the report and on the call are (1) the pace of share buybacks which have been very aggressive, (2) the outlook for the theme parks given that visibility has shortened, (3) comments on progress building out the internet businesses, and (4) any impact from the writer's strike.

Here is a brief look at the company's business segments....

....Broadcasting: Despite weak overall ratings at ABC a strong market for advertising and good ratings in key time slots, should allow this segment to enjoy revenue growth of 4% and operating income growth of 14%. The shutdown of the Disney Mobile venture will benefit the quarter as well. Comments on the writer's strike especially as it relates to the March quarter will be of interest. Also the timing of political spending at the TV stations will impact guidance.

Cable Networks: This segment is projected to show revenue growth of 14% and operating income growth of 13$. ESPN is benefiting form being DVR proof leading to rising ad demand and prices even as ratings were down a bit this year. The Disney Channel is smoking although since it is not ad supported the flow through may not be quite as large as might be expected. This segment contains the company's recent acquisition of Club Penguin which could impact comparisons. As usual the timing of revenue recognition at ESPN can distort the quarter along with bumps in sports rights fees.

Studio Entertainment: This is the segment that will drag down corporate results. The problem is tough comparisons in the very profitable DVD business. Last year Pirates 2 and Cars sold extremely well. This year Pirates 2 was less popular and Ratatouille was only releases in the US. Ratatouille performed much better at the international box office. Disney did have good depth in the top 20 selling titles during the holiday season which may offset the tough comp to some extent. Disney also had a good quarter at the box office which sets up future DVD sales and also will help offset the tough DVD comp. Overall, analysts are looking for the segment to report a 3% drop in revenues but a 19% drop in operating income.

Theme Parks: Despite lots of concern there was no slowdown at the theme parks in the December quarter. Thanksgiving was the busiest ever at the domestic theme parks and reports on Christmas were robust. A weak dollar is helping. Disney vacations are booked far in advance providing some insulation against the early stages of a consumer slowdown. Thus, the discussion on the call will be about the outlook. Last week management made constructive comments. I expect those to be reiterated and fleshed out against tough questioning from analysts. At the international parks, Hong Kong is struggling while EuroDisney continues its turnaround. For the December quarter, revenues should grow 7% with operating income rising 14%.

Consumer Products: Disney's content generation engine has been on fire which should drive good growth in this segment despite tough comps. Analyst estimates call for 12% growth in revenues and operating income. High School Musical, Hannah Montana, Cars, Pirates, and Ratatouille are key properties. Video games are in this segment which can swing profits either way as the business is still in investment mode but beginning to generate hits.

Posted by Steve Birenberg at February 4, 2008 01:20 PM in DIS