the results

After the New York close on Wednesday February 8th , DIS reported results for its 1Q11.  Removing one-time items, earnings per share were $.68 vs.  $.47 in the year-ago quarter.  This is a 45% gain, year over year.   It handily surpassed Wall Street analysts’ estimates of $.56.  That’s why the stock was up sharply in otherwise lackluster trading on the following day.

the details

Media Networks:  operating income was $1.07 billion, up 47% year on year.  The main reason was, as usual, ESPN, fueled by booming demand for the NFL and college football.  On a like-for-like basis, ESPN’s ad revenue was up 27% year on year.  The current quarter looks to be at least as good.  “They’re just having a gangbuster revenue quarter right now and we believe that’s going to continue,” said DIS CEO Bob Iger in the earnings conference call.  Autos, retail, telcos and consumer electronics firms are all sources of advertising strength.

Studio Entertainment: operating income was up by 54% year on year, at $375 million.  Domestic DVD sales of Toy Story 3, early international release of TS3 and lower writeoffs of money-losing films (as DIS cleaned up after a since-departed management team) are the main reasons.

Consumer Products:  operating income was $312 million, a 28% increase over 1Q10 performance.  Sales of Toy Story merchandise and the inclusion of Marvel products are responsible.

Parks and resorts: This is the interesting one. Operating income was up 25% year over year, at $468 million, on a revenue gain of 8%.  The strong results come despite horrible weather–snow and extreme cold along the East Coast and in Florida, plus rain and flooding in southern California–that hurt (mostly local) patronage of both Disneyland and Disneyworld.

Normally there’s an inverse relationship between unit pricing and unit sales.  Raise prices and you sell fewer units.  You hope to end up with higher revenues and profits, but you expect to see the pricing/units tradeoff.

In the case of DIS, over the past year the company has been gradually removing the discounting it started during the recession to try to stimulate demand.  However, despite higher ticket pricing, domestic park attendance was up by 2% year on year and per guest spending was up by 8%.  Also, despite higher room rates, hotel occupancy was 85%, up 4% year on year.  Average room spending was up 4%, too.

In another sign of a recovering consumer, demand for Disney cruises is building, especially for the newly launched Disney Dream, which is almost 90% booked for the year.

We’re not back to normal yet.  Customers are booking late and are gravitating toward less pricey rooms.

As an investor, I look at this behavior as a good thing,  It means that there is still a lot to go for in terms of revenue growth in the parks and resorts business.  As this quarter’s results show, in a capital intensive business like this, even small increases in revenues will translate into large gains in operating profit.

my thoughts

I sold my DIS at around $40 within the past couple of weeks.  I used the proceeds to buy a couple of smaller mobile internet-related stocks (what can I tell you, I’m a very aggressive investor).  That’s me, however–not necessarily you.

On the plus side, DIS has strong top management, media networks are booming, the film side has had a number of spectacular successes, and the parks and resorts are in the early stages of a cyclical upturn that could go on for several years.

If all goes (even moderately) well, the company could earn, say, $2.75 per share for the year ending September 30th.  Applying a multiple of 16 to that figure yields a price of $44.  An 18 multiple, which I think is close to the high end of what’s possible, would yield a price of around $50.  It may also be that, if the stars are aligned correctly, eps comes in closer to $3 a share.  If so, the stock presumably goes higher still.

Also a plus, the company is not as well understood as I think it should be.  That’s partly due, I think, to the fact that it’s an entertainment conglomerate and therefore doesn’t fit neatly into Wall Street’s way of organizing research, by using industry specialists.  In addition, in the couple of times I’ve dealt with it, I’ve found the DIS investor relations department–whether by accident or by design–to be pretty useless.  That makes it harder to do the analysis you need to have confidence that an out-of-consensus earnings forecast could be correct.

On the other side of the ledger, while I’m a big Marvel fan, I’m not sure how successful Thor and Captain America are going to be–and they’ve got big (super-hero, in fact) boots to fill just to keep year to year film earnings comparisons positive.  Also, NFL or NBA labor problems that result in games not being played wouldn’t be good for ESPN.

When I started looking at DIS in the mid-$20 range about 18 months ago, I realized that the (bad old days of the) Eisner era had ended (except in the IR department) and that very few people realized this.  Since then, Bob Iger has been on magazine covers and lots of evidence of his work is there to see.  The stock has also gone up a lot. That has changed the risk/reward relationship.

At $40, I see 10%-20% upside in the near term and mildly market-beating performance after than.  Not a bad story.  But there is some uncertainty to ESPN, I think, and the bar has been set a lot higher for the movie business, creating risk here as well.  More importantly for me, I saw (admittedly, much more speculative) names where I thought the upside was much higher.

In the mid-$30s–assuming DIS ever were to get back there–I’d probably be a buyer again.