Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Dow-30 Earnings: The Walt Disney Company – Third Quarter Fiscal 2012
Media and entertainment giant Walt Disney Co. (DIS – Free Walt Disney Stock Report) has registered stellar fiscal third-quarter (ended June 30th) earnings. The bottom line jumped 29%, to $1.01 a share, easily beating our $0.87 estimate. (Last year's share-net figure excludes $0.01 from restructuring and impairment charges.) However, revenues of $11.088 billion came in slightly below our $11.160 billion call. The bears pounced on this news early, but Disney stock recovered and was up slightly in late-morning trading.
Solid results across all of Disney's business segments spurred profits, but the lion's share came from the Studio Entertainment division. The success of recent blockbusters, namely Marvel's The Avengers and Pixar's Brave, helped its movie production subsidiary rebound nicely in the June period. This segment was hard hit by the box office failure of John Carter in the second quarter. Even though revenues were flat year over year, increases in worldwide theatrical releases (mainly thanks to The Avengers) and better global television distribution enabled the studios to post a strong comeback. These results more than offset sluggish Home Entertainment totals, which were hurt by lower Muppets and John Carter DVD sales.
The Disney studios have a strong film slate for 2013 and beyond, as well. The company plans to release sequels for several of its Marvel franchises, including Iron Man, The Avengers, and Captain America. Other films, such as Oz: The Great and Powerful, Lone Ranger, and Pixar's Monsters University, should round out its roster nicely.
Turning back to the June quarter, better licensing revenues from Avengers merchandise and the Spiderman franchise helped lift Consumer Products income roughly 35%. Disney ought to leverage the brands and creative content (especially of its newer Marvel and Pixar additions) to build brand equity.
Disney's Parks and Resorts operation was another bright spot. Operating income was up 21% during the interim, with most of the strength stemming from its domestic parks and cruise lines. Increased guest attendance, combined with higher ticket prices, led to increased guest spending. This also countered rising operating costs and supported the bottom line. In addition, Disneyland Tokyo made a significant comeback (last year's results were hurt by the earthquake and tsunami in Japan).
The company has made hefty investments in its Parks and Resorts group in the past few years. It doubled guest capacity on its cruise lines, expanded Disneyland, and strengthened its overseas parks (specifically in Asia). Management announced that the bulk of its capital program will be completed by the end of fiscal 2012. Overall, we look for its recent expansion to generate solid returns and to drive long-term growth.
Media Networks grew modestly in the June interim, and profits from broadcasting units and cable networks increased 3%. Disney Junior, launched in March, has already begun to gain steam, and the Disney Channel benefited from higher affiliate fees. Too, increased viewership and improved advertising and subscription revenues helped. Even so, totals at ESPN were down due to deferred revenues, and rising programming and production costs plagued its networks. This segment will likely register only modest gains in the fiscal fourth quarter, should operating costs not subside (owing, in part, to contractual rate increases from the NBA and Major League Baseball). Additionally, advertising revenues may decline in the September quarter due to the Olympics.
Earlier this year, Disney inked a distribution agreement with Comcast (CMCSA) to widen its audience. It has begun to take advantage of the increasing popularity of non-traditional media (i.e., mobile technology) and rolled out several apps to keep up with viewers on the go. The company will probably eye other partnerships to better leverage its content library.
To this end, the company has been investing in technological innovation and strengthening its Interactive segment through social media and interactive platforms. Although this unit operated at a loss during the quarter, Disney roughly halved the games and online business deficit.
Looking ahead, we have added a dime to our full-year fiscal 2012 bottom-line estimate and look for profits to climb 20%-25%, to $3.15 a share. Although the media giant slowed the pace of stock buybacks during the fiscal third quarter, repurchases will probably remain a priority, thereby boosting per-share comparisons going forward. Revenue growth will likely be moderate in comparison, and the top line ought to increase at a 5% clip this year.
About The Company: The Walt Disney Company operates Media Networks such as ABC and ESPN, and Studio Entertainment. Its world famous parks and resorts include Disneyland, Walt Disney World (Magic Kingdom, Epcot, and Disney’s Hollywood Studios), while the company earns royalties from Tokyo Disneyland and manages Disneyland Resort Paris and Hong Kong Disneyland. It also operates a cruise line and Consumer Products and Interactive Media segments. ABC was acquired in February, 1996, Pixar in May, 2006, and Marvel in December, 2009.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.