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November 13, 2009

Less Than Meets the Eye at Disney

Disney reported better than expected fourth quarter 2009 financial results. Benefiting from an extra week, the company reported adjusted EPS of 46 cents, easily beating consensus of 40 cents. Revenues also beat expectations handily, coming in at $9.69 billion against a consensus estimate of $9.26 billion.

Although it got little direct questioning on the call, I think a material portion of the upside came from the extra week. My initial back of the envelope calculations still show some upside but not enough to justify the initial 3.8% pop in the stock. I'll be surprised if the stock is up that much when it opens in NT on Friday.

Highlights of the quarter include -3% ad sales at ESPN, weak them park revenues and margins, and the expected poor performance of operating profits at the movie studio. On the upside, there was improvement at ABC and the local TV stations and affiliate fees at the cable nets continue to show steady gains.

Like other media companies that reported last week, Disney indicated ad trends are improving. Ad sales are getting an added boost from good ratings at ESPN and a decent start to the new TV season at ABC including a couple of new shows turning into hits. The company mentioned that scatter pricing is running up 20% and that option pickups for the March quarter are the best in ten years. Trends at the local TV stations improved to -15% in the September quarter. Management was less optimistic about December quarter trends than other TV station owners who reported last week.

Disney's theme parks set the company apart from the rest of the media companies. I find trends here to be a bit worse, especially adjusting for the extra week. Attendance is holding up well but the cost is high with revenues down more than 10% adjusting for the extra week and also an unspecified amount of sales of Vacation Club properties. Reported results in 4Q09 showed revenue -4% and operating income -17%. This is another indication of pressure on the business as margins are declining.

To me the most interesting comments on the call came from Bob Iger as he explained that the secular changes in DVD consumption are driving the management changes and organizational restructuring at the movie studio. Iger stuck a tone that was much more concerned than other studio owners about permanent changes to the DVD market relative to cyclical impacts.

As the call wraps up, the stock has given up about half of its initial after hours gains. Overall, I find management to be balanced in its view of the future and less hopeful than other media companies. However, at least part of this can be chalked up to the fact that Disney is normally not very promotional. Analyst questions are not particularly tough suggesting that estimates will be stable despite my initially more pessimistic view of the numbers than the street.

Posted by Steve Birenberg at November 13, 2009 09:13 AM in DIS