Tag Archives: DIS

DIS 3Q12 earnings–highest all-time profits

August 14, 2012 By in earnings conference calls, Entertainment, Industry Analysis, Lodging, Stock ideas Tags: , , , , , Leave a comment

the report

On August 7th, DIS released profit results for 3Q12 (the DIS fiscal year ends in September).  The company posted its highest quarterly profits ever–$1.83 billion.  At $11.1 billion, revenues were up 4% year on year for the period.  EPS were $1.01.  That was 29% from the $.78 posted for 3Q11.  It also compares favorably with the Wall Street consensus estimate of $.93/share.

The stock initially broke through the $50 barrier on the upside on the news.  It has since settled back a bit below that mark.

the details

media networks

This segment makes up 2/3 of DIS’s operating income.  It’s mostly cable; and of that, the lion’s share of profits come from ESPN.

Operating income was flat, yoy, at $2.13 billion.  But a change in contract terms with Comcast has shifted into 1Q and 2Q $139 million in payments normally recognized in 3Q.  There are other underlying complicating factors (the norm for this segment, and for DIS overall) as well.  On an apples-to-apples basis, op income for Media Networks is probably growing at 10%+.

parks and resorts

This segment represents a bit less than 20% of DIS’s op income.

Parks and Resorts were up 21% yoy during 3Q12, at $630 million.  The comparison is flattered, however, by higher yoy royalty payments from Tokyo Disneyland, based on a rebound in attendance from the earthquake/nuclear disaster-depressed 3Q11.  DIS also received in the current quarter an insurance settlement for business interruption at Tokyo Disneyland last year.

Business is recovering strongly at DIS’s domestic theme parks–thanks in part to the successful makeover of the California Adventure park at Disneyland.  The company has new cruise ships and bookings are perking up as well.

Normalized growth for Parks and Resorts is probably closer to 10%.

studio entertainment

Movie results were up over 6x to $313 billion, thanks to the Avengers film, which has taken close to $1.5 billion worldwide.  Even so, films now represent less than 10% of DIS’s overall operating income.  Of course, successful movies can also have positive rub-off effects on the theme parks.  They’re the foundation of much of DIS’s merchandise sales, as well.

consumer products

To some degree, Consumer Products earnings are affected by internal negotiations about revenue sharing among segments about sales of character-related merchandise.  That was a yoy positive in 3Q12, when this segment posted op income of $209 million on sales of $742 million.  Growing at maybe 10% yoy, Consumer Products represents considerably less than 10% of DIS.

interactive

DIS’s gaming and internet businesses continue to make losses.  The good news is that interactive is gradually approaching breakeven.  The segment lost $42 million in the current quarter, less than half the deficit in the year-ago period.

a shift in international strategy at ESPN

For the past couple of years, DIS has spoken enthusiastically about international expansion possibilities for ESPN.  Its initial foray was to be soccer broadcasting in the UK.  the company’s tone was somewhat less positive a quarter ago.

During Q&A after the 3Q12 earnings announcement (you can get transcripts for free from Seeking Alpha–a really very valuable service), DIS management said in effect that it is reining in its European expansion plans after losing in the bidding for Premier League broadcasting rights.  It has also ended its Asian jv with News Corp.  ESPN is now concentrating on expansion in Latin America.

It’s too simplistic to characterize the UK expansion attempt as a mistake.  Rather, incumbents there (correctly, in my view) recognized the threat that ESPN posed and were willing to take substantial near-term losses in order to deny a powerful new competitor a foothold in their market.  Not pleasant for them, but the correct strategic move.

As for ESPN, this removes the near-term possibility of large positive earnings surprise from a new profit source.  But the immense popularity of its sports programming in the US make it a steady grower at 15% or so for the foreseeable future.

theme park cap ex is peaking

Other than for its theme parks, DIS isn’t in very capital-intensive businesses.  Of its total segment capital expenditure of $2.5 billion so far in fiscal 2012, $2.3 billion is attributable to expansion at Disneyland and Disneyland Paris, as well as construction of Shanghai Disney.  With Disneyland expenditure finished, the company is beginning work on overhauling Fantasyland in Disney World.  Despite this expense, company cap ex will likely gradually decline from the current level, providing higher free cash flow for dividend increases and further stock buybacks.

buybacks continue

Year to date, DIS has repurchased 55 million shares of its stock at an average price of a bit over $38 each.  During 3Q12, the buyback pace slowed somewhat, with 8.6 million shares bought at an average price of $43.37.

In its earnings conference call, however, DIS made it very clear that it regards its intrinsic value as significantly higher than the current share price–and that, therefore, buybacks will continue.  It intends to devote about a third of its free cash flow to a combination of buybacks and dividend increases.

my take on the stock

Accounting quirks aside, DIS seems to me capable of delivering 15% annual earnings growth, with limited cyclicality.  The stock is trading at a slight premium to the S&P 500.  It has strong management and a collection of iconic brands, the most important of which is ESPN.  My guess is it will be a mild outperformer over the year ahead.

more on Disney’s September 2010 quarter

November 14, 2010 By in Current Market Thoughts, earnings conference calls, Entertainment, Getting financial advice, Industry Analysis, Investment firms, Lodging, Stock ideas Tags: , , , , , , , Leave a comment

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.

conclusions

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.

Disney’s 4Q10: a strong quarter Wall Street initially panned

November 12, 2010 By in earnings conference calls, Entertainment, Industry Analysis, Lodging, Stock ideas Tags: , , , , , , , 2 Comments

DIS reported fourth quarter fiscal 2010 (ended October 2nd) results yesterday.  The earnings release was supposed to be available only after the close.  DIS worried that the information was somehow leaking out into the market, however, and published the figures at 3:45pm, fifteen minutes early.  The stock dropped about 4% on the news, but recovered a bit before the close–and some more after.

the results

DIS earned $.45 per share, adjusted for writeoffs, on revenue of $9.74 billion for 4Q10.  This compares with eps of $.46 on revenue of $9.7 billion in the comparable period of fiscal 2009.  DIS doesn’t give detailed earnings guidance.  The reported results fell a penny shy of the Wall Street consensus, however, which covered an unusually large amount of territory for the quarter, ranging from $.39 to $.53.

the adjustments

Hang onto your hat.

1.  DIS’s financial reporting is based on weeks.  This has not-so-obvious accounting consequences.

Q:  How many weeks in a year?  A: 52.    But 52 x 7 = 364.    This means 52 weeks falls one day short of a full year, except in leap year, when it falls two days short.  Therefore, to keep its accounting year more or less anchored to the actual calendar, every six or seven years, DIS has to make a leap-year-like adjustment by having a 53 week year.

That happened in fiscal 2009.

Because of this, the fourth quarter of fiscal 2010 contains 13 weeks, but the fourth quarter of fiscal 2009 contained 14–meaning it had 7.7% more days in it.

There’s no easy way to make an accurate adjustment that will make the year on year comparison an apples-to-apples one.  The the thing any portfolio manager worth his/her salt will do is to make an easy adjustment that may not be accurate but will give a flavor of what the right number should be.  In this case, let’s assume the extra week has no operating leverage effects.  In other words, let’s just multiply the 4Q2010 eps by 1.077.  That yields eps of $.485, a $.035 gain.

2.  DIS’s cable deals are like oil and gas deals, insanely complex and no two alike.  One common feature, though, is minimum performance guarantees (of one sort or another).  In general, these contract clauses call for higher payments to DIS throughout the year if the product it sells exceeds the contractual guarantees (whatever they may be in a given contract).

How does DIS account for these contracts?  It starts out with the assumption that it will not meet the guarantee minimums (even though it may think it can do so in its sleep) and reports the only the amount it would earn if it didn’t.  Once it achieves the minimum, however, DIS does two things.   It begins to report the higher amount from that point onward; and, in the quarter it hits the minimum, it reports–in one big lump–all the extra money it has earned year-to-date at the higher meeting-the-minimum rate.

Normally, this is a bonanza for the fourth quarter.  Fiscal 2010 was so good, however, that the big payday came in the third.  Here are the figures:

deferred revenue recognized:

3Q2010     $344 million     vs.     3Q2009     -$37 million

3Q2010     $170 million     vs.     4Q2009     $524 million.

Net extra payments in the second half of 2010 were $27 million higher than in the second half of fiscal 2009.  But hitting the minimum performance levels earlier this year than last shifted $.09 in eps that would normally be shown in the fourth quarter into the third.

3.  Oh, yes.  DIS is exiting its image capture business, IMD, and wrote off $100 million ($.07 a share) that reduced operating income from the Media Networks segment.

Let’s add all this up.  $.45 reported + $.035 to correct for the extra week last year + $.09 for the cable contract timing shift  +  $.07 for IMD   =  $.595.  In other words, 4Q2010 was a really good quarter.

things I noticed in the report

From an investment point of view, the key positive is that the advertising market is growing very strongly, both for ESPN and for ABC.  But there are other positives that caught my eye as well, namely:

Writeoffs of older, unsuccessful movies appear to have stopped.  For the full fiscal year, DIS reported impairment charges of $132 million, the largest part of which was for writeoffs of abandoned/unsuccessful movie projects.  The fourth quarter number was only $3 million.  If I’m correct, this is a real positive.

The theme parks are perking up.  Adjusting for the extra week last year, park attendance was up 1% and spending per person up 6% for the quarter.  Hotel occupancy was flat, with spending up about 5%.

Hotel reservations are up 5% year on year so far in 1Q11, with room rates also up by about 5%.  Unlike the case during the past couple of years, both metrics are moving in a positive direction.

what about the stock?

I like it.  It probably won’t be a rocket ship ride, but up 15% in eps is easily achievable in the current fiscal year, I think.  The company has also been buying back its own stock at around the $35.50 level recently–always a good sign.  I probably should mention, though, that I trimmed my DIS position a bit a couple of weeks ago, because I thought it had gotten too big.