DIS’s 4Q12: more earnings progress, but a stock price fall

I’m still using my phone as an internet connection.  

Still no word from Comcast about when service will be restored.   But I’ve seen my bill.  No adjustment for half a month without service!  This behavior contrasts so sharply with that of every other company I’ve seen that I’ve got to believe there’ll be a lot of negative fallout when people realize what Comcast is doing.

DIS’s 4Q12

After the close last Thursday, DIS reported 4Q12 and full fiscal-year 2012 results.  The company earned $.68 per share during the three months ending September 29th, up 15% year on year, on revenues of $10.8 billion, up 3% yoy.  For the twelve months of fiscal 2012, DIS posted eps of $3.07 on revenues of $42.8 billion.  Earnings were up 21% yoy, on a revenue gain of 3%.

The stock dropped about 7% on the report.

Yes, 4Q12 eps growth was less than the rate of gain earlier in the year.  And, yes, Wall Street never likes such deceleration.  But I don’t think that was the main reason for the decline in DIS shares.  Rather, during its conference call management told analysts that 1Q13 eps will probably be no better than flat with 1Q12.  After that, comparisons will likely pick up   …but DIS didn’t say by how much.  The lack of guidance isn’t unusual.  It’s the way DIS operates, and it’s fine with me.  But in this instance, the uncertainty (temporary, I think) about fiscal 2013 eps growth caused the selloff in the aftermarket and on Friday.

On Friday, I rebought much of the stock I had sold a while ago at around $40 a share.


I’ve come to think that I’ve underestimated the growth that can come from the non-ESPN side of the business–the Disney side, meaning the theme parks, movie studios and consumer products divisions that together produce about a third of today’s total DIS operating profits.  I especially like the acquisition of Lucasfilm.

Also, I think the weak 1Q13 is more a function of accounting quirks than fundamental weakness. Specifically:

a flat 1Q13

The factors behind this are:

Hurricane Sandy, although DIS says the superstorm hasn’t prevented any Jerseyites from getting to Disneyworld so far.  But certainly some stores and movie theaters were closed during the storm.  And some customers hurt by Sandy will have less discretionary income for a while.

Whatever the effect, it’s likely to be small, negative and transitory.

ESPN.  The sports giant has signed major new contracts for sports content.  It will take a while for ESPN to pass higher programming costs on to customers.  Also, while the presidential election season is great for advertising in general, it’s not so good for ESPN.

Disneyworld.  The Florida theme park is undergoing its first major overhaul in 40 years.  The parks are also in the middle of making a big upgrade to their computer systems.  Much of these costs are being recognized as expenses right now, rather than being stored up on the balance sheet and being shown as reductions in income over the life of the assets.  What DIS is doing is more conservative, which I approve of.  But that won’t change the fact that eps won’t look as good as they otherwise would.

the week as the major accounting unit of time.  Readers of my prior DIS posts will be familiar with this issue.  Most companies keep their accounts on a month-by-month basis.  Hotels and retailers–and DIS–typically keep theirs on a week-by-week basis, which they believe gives them better control over operations.

The four 13-week units the latter companies use don’t match up exactly with the calendar year.  For DIS, this means that the bulk of the lucrative New Year holiday–and the $30 million in operating income this entails–will end up being in 2Q this fiscal year vs. 1Q last.

movies  1Q12 benefitted from Cars 2 and the rerelease of Lion King.  There’s nothing comparable in the hopper for 1Q13, so DIS estimates a falloff of $150 million in operating income.

Except for the Studio Entertainment segment, all these are timing, or accounting presentation, issues rather than economic ones.  And in the case of movies, no one can manufacture hits each quarter, so this is just a function of the way the business operates–and why it gets a lower earnings multiple than more predictable ones.

my take

I think the recent selloff is a mistake.  My guess is that fiscal 2013 eps will come in at about $3.50, assuming Washington doesn’t drive us over the fiscal cliff.  To my mind, that prospect justifies a price in the low to mid $50 range.  But comparisons will likely be accelerating into fiscal 2014, creating the possibility of multiple expansion from the 15x I’m assuming.  Not necessarily a rocketship ride, but still probably meaningful market outperformance.

One response

  1. Your daily e-mails are very insightful – always worth reading. What bothers me about Disney is ESPN: sports fans will migrate to whatever outlet carries the game, so what is ESPN’s longer term competitive advantage?

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