Tag Archives: Disney

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.

a quick look at DIS

May 15, 2012 By in earnings conference calls, economics, Stock ideas, Strategy Tags: , , , , , Leave a comment

a little history

I became reacquainted with DIS in late 2009 when the company bid for Marvel Entertainment, which I had been a shareholder of for a couple of years.  Several things struck me about DIS that made the investment case more compelling than I expected:

1.  A new chairman, Bob Iger, was steadily reenergizing a company that had suffered for years under complacent and bureaucratic management, as happens with many mature firms.

2.  Although the price being paid, $4 billion, seemed pretty full to me, I knew Marvel would benefit from DIS’s stronger distribution.  And I also saw that Mr. Iger wanted to build the attractiveness of the Disney brand to boys, so Marvel had an “extra” value to DIS.

3.  The theme parks were suffering from the Great Recession.  I thought results would gradually improve as the economy recovered, first through an increase in foreign tourists, then through a return of US vacationers.

4.  Wall Street didn’t like the Marvel deal, which made DIS even cheaper.  So I bought some more.

I ended up selling most of my DIS stock about a year ago, soon after it popped above $40 a share.  Two reasons:  the stock was up a lot, and I worried that possible strikes by the NFL and/or NBA players would dent the profits of ESPN, which is DIS’s dominant business.

I’ve still kept my eye on DIS, which has been a market outperformer even after my sale.  The media reports of strong theme park business in 2Q12 (ended March 31st) when the company reported results last week caught my eye.  So I thought I’d take a closer look.

Here’s what I found.

DIS’s 2Q12 results

Excluding unusual items, earning per share were up 18% year on year, at $.58 vs. $.49 in 2Q11.

parks and resorts

Disney cruise line bookings were up 30% yoy.

Domestic theme park attendance was up 7% yoy, with spending per person up 5% in addition.

Occupancy in park hotels was up 2% yoy at 82%.  Room rates were up by about 5% as well.

Disneyland set a new 2Q attendance record.

The strength in the domestic theme park business comes from two sources:

–foreign tourists, especially from Latin America and Asia, and

–reviving interest from in-state residents in California and Florida.

Out of state domestic visitation to the parks was about flat, yoy.

Operating income from the worldwide Parks and Resorts business was up 53% yoy at $222 million.  The comparison is skewed by the closing of Tokyo Disneyland last year after the mid-March nuclear reactor accident in Japan, combined with a $15 million business interruption insurance payment made in the current quarter.  Ex these factors, the theme park business was probably up a bit over 20%.

To me, the most encouraging news is that residents of two of the areas hardest hit by the domestic housing crisis–southern California and Florida–are starting to come back to the Disney parks.

studio entertainment

Currently, this business is a tale of two movies.  John Carter, which may have made a $100 million loss, is certainly the main reason Studio Entertainment operating results dipped into the red by $84 million in 2Q12.  The other is The Avengers, which reportedly cost $220 million to make but which has had box office of over $1 billion in the first three weeks.  So 3Q12’s results in this segment will doubtless be eye-popping.

consumer products

Avengers-related merchandise sales are going much better than DIS had planned for.  A change of actors appears to have even breathed back life into the Hulk.

media networks

This segment is two-thirds of DIS’s operating income and is driven mostly by ESPN.  Changes in affiliate contracts and the differences in  timing/number of sporting events make year-on-year comparisons particularly hard for an outsider to interpret.  The reported you gain in operating income is 13%.  DIS says an apples-to-apples comparison would be more like half of that.

my thoughts

I find the implications for the US economy in DIS’s results to be encouraging–and consistent with what other companies who appeal to a broad range of Americans are saying.

DIS shares aren’t expensive.  They’re trading at 15x the Wall Street earnings consensus of $3.00 a share for fiscal 2012.  Trend growth is probably around 15% a year.  My guess is that they’ll be mild outperformers over the year ahead, with their best relative showing coming in uncertain days like these.

 


 

 

Disney’s eventful 2Q11 (ended 4/2/11)

May 12, 2011 By in Current Market Thoughts, earnings conference calls, Entertainment, Industry Analysis, internet, Lodging, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

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.)


mouse-eared vacationers returning: DIS’s strong 1Q11 quarter (ended 1/1/11)

February 10, 2011 By in Current Market Thoughts, earnings conference calls, Entertainment, Industry Analysis, Lodging, Stock ideas Tags: , , , , , , , , , Leave a comment

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.

 

 

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.