more on Disney’s September 2010 quarter

As I mentioned in my post from Friday, DIS reported its September quarter (actually ended October 2nd) results shortly before the close on Thursday afternoon.  The stock dropped sharply on the news release, because the market perceived that the company had “missed” analysts’ expectations for earnings per share by a penny.  Sell-side analysts seemed nonplussed by the apparent weakness.  I heard one analyst, identified is being one of the most highly sophisticated followers of DIS, say in an interview that she hoped to get some clarification of the poor numbers during the company’s conference call that evening.

DIS shares were very strong from the opening bell on Friday and gained 5% on the day, moving counter to an overall market decline.

What happened?

Three factors–other than the unusual release time–conspired to create the initial confusion:

1.  Sell-side analysts who follow the company seem to have been unaware of truly basic facts about how DIS recognizes earnings–although even a casual reading of the company’s earnings releases would reveal them.  They are:

a.  that the fourth quarter of 2009 was 14 weeks ling vs. 13 for this year’s period, meaning last year’s quarter had about $.03 “extra” in eps, and

b.  that $.09 in eps from cable contracts that is normally recognized in the fourth quarter had been already recognized in the third this year.

Together, these two factors meant that the proper base comparison against which to judge 4Q2010 eps wasn’t $.46 but about $.34.  So $.45 in eps represents a 32% gain over last year–a huge quarter and not a “miss.”

It’s true that some short-term speculators scan earnings releases electronically for key words and automatically generate trades when they see positive or negative surprises.  That accounts for the speed of the Wall Street reaction.  But the real issue was that analyst estimates were inexplicably bad.

To my mind, there’s no way the consensus earnings forecast should have been $.46, or that analysts’ estimates should have ranged as high as $.53.  The only way this could have happened is that they didn’t factor in either a. or b. above into their numbers.  The fact that no one issued flash “buy” reports on the stock weakness, and that the “best” analyst on DIS would say on tv that the numbers were bad and that she wanted concrete information and not excuses from management on the conference call, reinforce my conclusion.

I’m dumbfounded.

Welcome to the new Wall Street reality.

Looking on the bright side, inefficiency in the market means a better chance for individual investors to do well.

2.  The DIS management seems to me to have high standards for performance.  I think that’s good.  But I think I can detect a half-scolding tone in management voices when analysts ask for explanations of aspects of company operations that have been covered in prior conference calls.  In other words, it’s unwilling to spoon-feed analysts.  Also, for competitive reason, there’s some information it won’t divulge.

3.  The investor relations function isn’t (…functioning, that is).  Typically, when an analyst wants company background that’s too basic to justify taking up top management’s time–and I read this management as one that doesn’t suffer fools gladly–he/she turns to the investor relations department to explain company structure, philosophy and operations.  If DIS wants better educated analysts (maybe it doesn’t), IR has to do a lot of the heavy lifting, reaching out to analysts if necessary.

The evidence in analyst behavior is that DIS’s IR isn’t doing its job.  I’ve only had one recent contact with this department, when I wanted factual detail on the terms of the acquisition of Marvel Entertainment.  After waiting in vain for a return call for almost two days, I found the data I needed on the Edgar site on the internet.

Yes, I realize I’m no longer in position of power on Wall Street.  But when I called IR to say I had the info and they should take me off their phone list of investors awaiting calls, I detected no sense of urgency, no sense of obligation to provide information to owners of the company or their representatives.  One interaction isn’t enough to generalize from. But the attitude is consistent with one that prevailed among big companies twenty or thirty years ago and has thankfully been changed in most places.


Assuming I’ve got a generally accurate assessment of the state of play at DIS, there may be future trading opportunities in this stock based on analysts lack of attention to detail.

I also suspect that as brokerage houses continue to reduce their commitment to analysts, given their view that research is a loss leader, that situations like this one will occur in more names.  Common sense and a little bit of effort may be very rewarding for ordinary individuals like us.

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