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July 18, 2006

Disney Pulls Back But Its Not Due To Pirates

Pirates of the Caribbean: Dead Man's Chest (POTC) continues to rule the box office. Nevertheless, Disney (DIS) shares have sold off since the movie was released. I wouldn’t chalk that up to any disappointment over the film, however.

In the early part of last week, before catching a downgrade on Thursday, DIS shares actually outperformed the market. I'd suggest that was the trading action related to the movie. Since then, I think the downgrade (built off the belief that street estimates for DIS EPS growth in 2007 are too high) and geopolitical tensions drove the shares lower. The quick strengthening in the dollar also probably contributed as DIS is sensitive to international travel at its Orlando theme park.

I maintain my view that 2007 results will not disappoint. Continued margin expansion at the theme parks, growth at ESPN, a solid upfront for ABC, and the flow through of profits from DIS very successful winter 2005 thru summer 2006 movie slate provide enough upside to meet consensus estimates. I think this fundamental strength will be evident when the company reports its June quarter. Recent sellers, shorts, and downgraders will regret their positions come the August 9th reporting date. One signal I could be right is that DIS shares finished up yesterday despite a second downgrade. I helped a tiny bit by adding DIS to a new client account.

Going back to the box office....

POTC fell about 54% last weekend from its record setting opening weekend, a performance that gives little guidance to box office observers who are trying to gauge its legs. A drop of 60% plus would have been a reason for concern while a drop of 40% would have put the film in the running for #2 all-time behind Titanic and ahead of Shrek 2. I standby my assumption that the film will gross over $400 million domestically.

Based on early international box office reports, a total of over $500 million abroad seems in the cards. In fact, with the film still only open in about 1/3rd of its foreign markets, Variety speculated the international haul could exceed $600 million making POTC the third ever film to cross $1 billion worldwide (Titanic, $1.8 billion; Return of the King, $1.1 billion).

Despite a solid weekend for POTC and in line openings for the two new films, Little Man and You, Me, and Dupree, total weekend box office fell for the first time in 8 weekends. The decline of 7% is nothing for box office bulls to be alarmed about. Last year, two of the summer's most popular movies, Charlie and the Chocolate Factory and Wedding Crashers both opened. Additionally, not be lost is the fact that the prior weekend was up an astounding $70 million, or 46%, from a year ago, and this past weekend was up 7% from 2004.

Year-to-date box office is up over 6%, implying attendance growth of about 3% this year for the supposedly dying theatre business. That myth will suffer another blow this weekend when I expect comparisons to return to positive territory. This continues to bode well for Regal Entertainment (RGC), whose shares have performed very well relative to the market's decline. I guess I'm not the only one who sees value.

Posted by Steve Birenberg at July 18, 2006 01:38 PM in DIS