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August 09, 2006

Strong Quarter For Disney But 2007 Concerns Limit Upside - For Now

In the short-term, I think investors will give DIS the benefit of the doubt given the outstanding results the company has achieved over the past several years, especially recently during Bob Iger’s brief reign. DIS is playing offense with a strong lineup. Investors should continue to applaud.

Looking a little more closely at the quarter….

Broadcasting suffered from heavy investment in new pilots and costs assoicatied with the Disney Mobile venture. Radio, which is being divested, was also weak, in line with industry trends. ABC and the stations performed OK otherwise.

Cable Networks saw slightly lower than expected revenues but great margin performance so that profits were at the very high end of expectations. ESPN is performing well and the Disney Channel is benefiting from the multi-platform success of High School Musical.

Theme Parks performed particularly well on margins with revenues at the high end of expectations. I was a little surprised that analysts were assuming flat or even lower margins despite consistent gains over the past few years. Marigns rose almost 200 basis points vs. a year ago. On the call, management expressed confidence in its ability to control costs in the future, providing some defense against the tough comps in theme park attendance. Occupancy in Florida and California is over 90% and per capita spending has been rising in the upper single digits.
The Studio was a blowout in the quarter. Revenues and operating profits beat expectations by at least $100 million. DVD sales for The Chronicles of Narnia. DVD units were up 9% with lower distribution costs and lower returns. This couldbe an indicating that DIS is getting its arms around the changes in the DVD market which have accompanied slower growth. Strong box office from Cars and lower costs at Miramax also helped the quarter. Higher costs for marketing of Cars and Pirates did hold back profits.

Consumer Products was very strong, with profits beating expectations by $20-30 million. Iger opened the call noting that Cars merchandise is incredibly strong with young boys and that Pirates may be the biggest cross platfrom success the company has ever had. Strength here should continue but will be offset by increased investment in distribution channels and video games.

Posted by Steve Birenberg at August 9, 2006 04:51 PM in DIS