the results
After the close of trading in New York on Tuesday May 10th, DIS reported financial results from its 2Q11, which ended on April 2nd. The company posted earnings per share of $.49, up 2% year on year, on revenues of $9.1 billion, up 6%. This compares with brokerage house analysts’ consensus of $.56 a share. The stock fell by 5.4% on Wednesday, as a result.
the details
DIS’s accounting is complicated, both because the company is a conglomerate and because it’s in the entertainment business, where bookkeeping conventions are really convoluted. Nevertheless, here goes:
media networks
Led as usual by ESPN, operating income from cable was up 15% year on year for the three months, at $1.357 billion. Broadcasting gained 36%, posting profits of $167 million. The $1.524 billion Media Networks earned represents more than three-quarters of DIS’s operating income for the quarter.
parks and resorts
Operating income from Parks and Resorts was $145 million for 2Q11, down by $5 million from the year-ago period.
Two special factors influence the comparison.
–Royalty income from Tokyo Disneyland, which is essentially pure profit (and which I’ve never really paid attention to), was lost for the 20 days Tokyo Disneyland was closed after the devastating earthquake/tsunamis in Fukushima prefecture on March 11th. As a rough guess, I’d say the closing reduced DIS’s operating income by $20 million (DIS management said in its conference call that lost royalties and Disney Store income amounted to $25 million, but didn’t break out the two components.)
–In addition, only one week of the highly profitable Easter/Spring Break period fell in 2Q11 versus both weeks in 2Q10. The Easter calendar shift represents a difference of $23 million in the year on year comparison.
On an apples-to-apples basis, I think operating income from Parks and Resorts would have been up by 25%.
studio entertainment
Operating income was $77 million for the quarter, down 65% year on year. Mars Needs Moms, a leftover from former Studio management. Need I say more? I will, anyway. Box Office Mojo estimates the film, released on March 11, cost $150 million to make. Rotten Tomatoes rated it 35 out of 100. Through May 8th, its worldwide box office was just under $21 million, according to BOM. Ugh!
Before this, I had thought that the recently installed Studio head had thoroughly cleaned house last year, so that nothing like this could happen again. From what I’ve read, however, it seems holdover executives defended MNM fiercely enough that it got made. If I understand correctly, the damage to the quarter from Mars Needs Moms, other than that no revenue to speak of came in, is $50 million spent to promote it and a $20 million writedown of the film’s balance sheet carrying value. DIS management implied that it had already taken prior writedowns of MNM in earlier quarters. Hopefully, this is the last we hear of the film.
consumer products
Operating income was up 7% year on year at $142 million. If I’m correct about a $5 million Disney Store loss in Japan (the number could be too high), ex-Japan, profits would have been up by 10%. Not great, but not so bad.
interactive media
DIS lost $115 million on the operating line in 2Q11, a little more than 2x the deficit this time last year. The larger red-ink figures come primarily from the acquisition of Playdom last year. $34 million represents an ongoing quarterly writeoff of part of the acquisition cost. The rest of the increase seems to come from DIS working out that Playdom games weren’t quite ready for prime time and needed considerable polishing.
2H11?–more moving parts
–On the film front, Thor was released last week; worldwide box office through May 10th is $266 million, according to BOM. Although neither the New York Times nor the Wall Street Journal liked this one, Rotten Tomatoes rates it a solid 79.
Pirates of the Caribbean: Stranger Shores opens on May 20th.
Cars II debuts on June 24th.
All three promise good news for Studio Entertainment in 3Q11. How good in terms of earnings will depend on what assumptions DIS has about the ability of these movies to sell DVDs–that will be the key determinant of how each movie’s costs are allocated against revenue.
–Life in Japan is gradually returning to normal. But citizens are questioning whether to exercise self-restraint (jishuku) in consumption as a way of showing solidarity with those in Fukushima. The mayor of Tokyo, for example, is strongly in favor of jishuku. It’s unclear how Tokyo Disneyland or Disney stores in Japan will be affected.
–DIS’s cable contracts call for higher levels of payment by affiliates to DIS once specified performance levels are achieved. DIS met these targets last year during 3Q, which is unusually early. It will likely not trigger some this year until 4Q. For the full year, DIS thinks affiliate revenue recognition will be up by $17 million year on year. But the payment recognition pattern will be: $228 million down year on year in 3Q and $245 million up in 4Q.
–3Q will contain one week of Easter/Spring Break, meaning about a $25 million boost to Parks and Resorts revenue.
–finally, although the ad market is booming, comparisons in the second half, which contained a lot of political spending last year, get tougher.
EPS for the second half? If someone forced me to make a guess, I’d say $.70 in each of 3Q and 4Q, giving about $2.60 for the fiscal year. I’d pencil in $3.00-$3.25 for fiscal 2012. But a lot depends on how well DIS’s series of potential blockbuster films actually delivers.
stepping back a bit
It’s easy to get lost in the twists and turns of DIS’s complex financial reporting. Looking in a more general way, we know that:
–the advertising market is booming and that ESPN is going from strength to strength.
–The parks are rebounding, as the world economy recovers, although jishuku may retard progress in Japan until fiscal 2012.
–If we’re lucky, the film business has had its last real clunker–and of course Mars Needs Moms may never be surpassed on the downside.
–And an optimist might hope that Interactive Media may draw close to breakeven, as promised by DIS management, by fiscal 2013.
The biggest near-term risk is that labor disputes in the NFL and NBA reduce ESPN’s viewership. DIS argues that it can substitute NCAA sports, if necessary, and remain relatively unscathed. I’m not convinced. I’m not saying DIS management is wrong. I’m saying that for now I don’t want to bet.
If one could put that concern aside, DIS is set to grow at about a 15% rate over the next few years and is trading at about 16x this fiscal year’s earnings and around 13x fiscal 2012’s. The stock’s valuation doesn’t seem excessive to me, but I’d prefer to be a buyer on weakness. (Remember, though, that I’ve sold my stock at about this level, so my conclusion could have an element of wishful thinking in it. But I am concerned that strikes by professional football and basketball players could have a significant negative effect on ESPN, despite DIS management’s analysis of the situation.)