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November 08, 2007

Disney 4Q07 Earnings Preview

Disney is expected to report strong 4Q07 financial performance capping another great year. For 4Q, consensus calls for EPS of 42 cents, up 17%, on revenues of $9 billion, up 2%. Operating income, a key metric for Disney investors, is expected to rise 14%. Estimates are unchanged since the last quarterly report although the tone of commentary about the quarter and 2008 has improved.

Assuming the quarter contain minimal downside surprises, a good assumption in my opinion, the response in Disney shares will be all about the 21008 outlook. Disney is wrapping up its fifth consecutive year of double digit operating income growth. With stiff comparisons against 24% operating income growth in 2007 and Disney's well-chronicled exposure to consumer spending via theme parks and advertising, there is a lot of concern about how quickly growth will decelerate in 2008. Current EPS estimates show an 11% growth expectation in 2008. That is good but probably not enough to drive the shares significantly higher. However, indications form management that 2008 is shaping up better than expected, a real possibility in my opinion, would allow Disney shares to break to new highs if the market is cooperative. I am very comfortable being long heading into the report and expect to remain long for at least another quarter or two.

Here is a look at anticipated segment results for 4Q07 and FY08....

....Broadcasting: For 4Q, revenue is expected to decline 3% due to a tough comparison against strong syndication sales a year ago. Syndication revenue is very profitable so the entire segment is expected to shift from a small gain to a loss of over $30 million. ABC should be flat as weak summer ratings are offset by very strong scatter pricing. Looking to 2008, ABC is off a decent start this TV season leaving some room to the upside to the upside relative to current estimates. Nevertheless, operating income growth in 2008 is unlikely to reach above high single digits.

Cable Networks: This segment should be the driver of 4Q results with revenues rising 20% and operating income gaining 26%. Strong ratings, affiliate fee growth, revenue deferral reversals at ESPN, and the elimination of losses related to ESPN Mobile will be the key contributors to growth. One potential negative to keep an eye on is programming expenses at ABC Family and the Disney Channel. For 2008, the segment will moderate but should grow double digits as ESPN benefits from much more moderate rights fee increases and affiliate fees and advertising continue to grow. Also, upside exists at the Disney Channel form High School Musical.

Theme Parks: Mid single digit revenue growth driven by high occupancy and growing attendance should lead to margin expansion and 10% growth in operating income. Theme parks have a high fixed cost base so as long as revenue drivers are intact, margin expansion is in order. For 2008, concern about consumer spending is holding estimates back to mid to upper single digit growth. Disney may also pick up some costs related to expansion of its cruise line, California park, and time share/vacation club business. These are worthwhile investments, however, as they should lead to a surge in segment growth and margins in 2010 and beyond.

Studio Entertainment: A tough comparison vs. 2006 when Pirates 2 was in theatres suggests a tough quarter for the studio. Revenues are projected to fall 21% with profits dropping 7%. Tight const controls and lower levels of marketing support for film releases are limiting the operating income decline. DVD comps are also tough this quarter. For 2008, lack of a Pirates film sets up a tough comp as does crowded DVD release calendar this holiday season. Mid-single digit growth would be a good outcome, although expectations are low to begin with.

Consumer Products: Benefits from High School Musical and easier comps should offset higher development spending on video games, driving 6% revenue growth and 16% operating income growth in 4Q. In 2008, similar drivers should lead to growth of around 10%.

Posted by Steve Birenberg at November 8, 2007 02:14 PM in DIS