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May 07, 2014

Content Engine Driving Disney to Great Heights

Disney (DIS) reported a big beat to March quarter earnings expectations with EPS of $1.11 vs. consensus of 96 cents. Revenues also were ahead of expectations at $11.65 billion vs. estimates of $11.23 billion. The primary driver of the upside was the film studio but strength was pretty much across the board with exception of advertising sales at ESPN and ABC.

If there was one thing that drove the results, it was the incredible success of Frozen. DIS is unique in that hit content filters through the entire corporation and large franchises like Frozen can drive financial returns for multiyear cycles as consumer products, theme park and cruise ship attractions, Broadway shows, and Disney-themed cable networks benefit. While there will always be misses on big budget films (John Carters, Mars Needs Moms, and Lone Ranger in recent years), the company is in the midst of a powerful content cycle that includes Avengers and the individual characters, steady success at Pixar, a revived traditional animation studio helped by Pixar leadership, and newly acquired Star Wars. 2015 shapes up really big with the next Avengers film and the first of three new Star Wars film.

DIS growth is likely to slow a little in the next couple of quarters as a round of big increases in sports rights hits ESPN. The company recently held an analyst day devoted solely to ESPN so I think the street is well aware of what is coming. Even in a giant quarter at the movie studio, cable networks, dominated by ESPN, represented 59% of total company operating income, so there could be a little turbulence in the stock price even as theme parks, the film studio, interactive, and consumer products continue to benefit from the red hot content engine.

Northlake recently subscribed to a new research service, MoffettNathanson Research, that specializes in media and communications. Craig Moffett and Michael Nathanson are analysts I worked with in the past when they were at Bernstein Research. This morning they are out with a brief note on DSI reminding investors of the 2005-2007 content cycle and how the company consistently beat earnings estimates driving the stock price. The comparisons to the current period seem apt. With content driving growth, steady gains at the ESPN, solid theme park performance and excitement likely to build about Shanghai Disneyland, and a big share buyback, DIS shares should be able to sustain a premium P-E multiple. 20 times what may prove to be a conservative 2015 consensus estimate of $4.60 gets the stock to the low $90s. In a suddenly tough tape for consumer growth stocks, DIS looks like a good choice.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. DIS is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Posted by Steve Birenberg at May 7, 2014 12:41 PM in DIS