Tag Archives: Disney

Disney’s March 2010 quarter: Alice was wonderful

May 12, 2010 By in Current Market Thoughts, earnings conference calls, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , 2 Comments

the eps

DIS reported its fiscal second quarter (ended April 3rd) after the close last night.  Ex unusual items, earnings per share were up 12% year over year to $.48 vs. $.43 in the comparable period of fiscal 2009.

My take is that the company’s economically sensitive businesses are showing genuine signs of life, that are not yet clearly visible in the financials due to the accounting conventions DIS has chosen to use.  There’s nothing wrong with what DIS is doing.  In fact, as I see them the accounts are on the conservative side–which is a good thing.  The company is (understandably) reluctant to provide too much information that may ultimately end up in the hands of its competitors, however.  And I think it assumes Wall Street analysts know more about what makes DIS tick than they do–I’m not sure how DIS could hold that opinion after even one earnings conference call, but I think it does.  So it doesn’t provide a lot of help in explicitly connecting the dots.

In any event, Wall Street reacted to what I thought was a pretty encouraging quarter by pushing the stock down by about 3% in after-market trade.

segment results

studio entertainment

Alice in Wonderland, despite iffy reviews (51% from Rotten Tomatoes), was a huge winner for DIS.  The film has grossed $962 million worldwide, almost all of that in 2Q.  That ranks it as the #7 movie of all time.  DVD sales will begin on June 1st, earlier in the film’s life than usual, which will likely stimulate sales.

Iron Man 2 has been out for two weeks internationally and one week in the US and is so far outpacing IM1 by grossing $334 million to date.   Toy Story 3, another likely blockbuster, is also in the hopper.

On the success of Alice, DIS reported 2Q operating income from films of $223 million, up from $13 million in 2Q09.

Yes, there’s an accounting issue in this business segment–how DIS has apportioned production/marketing costs for Alice (my guess is that the company has been very conservative, wiring off almost everything against theatrical release–meaning the possibility of a positive surprise if DVD sales go well).  But the real question is operational.  Is Disney’s (non-Pixar) filmmaking, which has shown itself out of touch with contemporary America, getting itself back in touch.

parks and resorts

Operating income for the quarter was down by $21 million year on year at $150 million.  The decline comes from the Disney Cruise Line, where the company benefitted a year ago from having its fuel costs hedged vs. being unhedged this year.  domestic theme park results were flat, as were international–which strength from Hong Kong offset by weakness (what else is new?) in France.

Three points:

1.  DIS’s books have the week as the basic unit, not the month.  Because a calendar year is 52 weeks + 1 or +2 days, every once in a while the New Year’s holiday, which typically yields a whopping $60 million in revenue for the parks, falls in the December quarter.   The current fiscal year was one of those times.  So something like $40 million (my guess) in operating profit was shown in the December quarter that would usually be recognized in the March quarter.  About a third of this negative effect was offset by having the first week of Easter fall into the March quarter.

In other words, on an apples-to-apples comparison the parks and resorts were up about 10% vs. last year.

2.  DIS is steadily raising its prices with the aim of eliminating recession-induced discounting by next fiscal year.  The company could be posting higher short-term profit numbers by continuing bargain-basement rates.  But for the long-term health of the brand, it’s important that DIS reestablish premium pricing as soon as possible.

3.  Leisure travel bookings are like an accordion.  In good times, vacationers reserve far in advance.  In bad times, they look for the best prices and book at the last minute.  In March 2009 quarter, we probably saw the last of the pre-Lehman demise “good times” reservations.  In the March 2010 quarter we are likely seeing the last of the post-Lehman “deep fear” bargain bookings.

In fact, somewhat exasperated by an analyst’s (misguided) analogy with business travel (which leads the economy, while leisure travel lags), DIS blurted out that it was seeing a sharp uptick in bookings recently.

media networks

As usual, it’s a tale of two cities.  Here are the figures, in millions:

Revenues

Cable                     $2412       +9% yoy

Broadcasting       $1432      +1%

Operating income

Cable                 $1183       +3%

Broadcasting     $123      -24%

Cable is basically ESPN.  Broadcasting is ABC TV Network + Studios.

I think Wall Street mostly ignores Broadcasting, figuring the best it can hope for is that ABC will not turn into a black hole that damages overall results.  So the focus is on ESPN, where revenues look ok–but not great–and operating income was uninspiring.

Again, the situation is a little more complicated–and more favorable for DIS, I think–that it seems.  Points:

1.  Revenues from 12 big college bowl games played on New Year’s Day were part of first quarter results this year and second quarter last year.  On an apples-to-apples basis, ESPN revenues were probably up 12% year on year.

2.  ESPN is trying to build up a sports presence in the UK.  To do so, it has to acquire sports rights first and subscribers later.  Startup equates to losing a lot of money.  DIS isn’t saying how much, but I think it’s safe to assume that this expense is offsetting the operating leverage that existing operations should be showing.  If DIS were building a manufacturing plant, these costs would be “capitalized,” meaning they wouldn’t be recognized as costs until construction was complete.  DIS can’t–and shouldn’t/wouldn’t do this.  But the fact that startup costs are being expensed obscures the profitability of the existing business.

3.  Advertising revenues are now rising by about 20%.  There will be a significant uptick in affiliate revenue starting in the third quarter as contractual minimums are achieved–some months sooner this year than last.

consumer products

This segment was up by $36 million year on year to $133 million, based on strong sales of Iron Man and Toy Story merchandise.

interactive media

Revenues were up by $26 million and losses cut by $6 million to a $55 million deficit.  This is the company’s new media, internet, video game division.  It’s almost like the inverse of ABC–losses now, with the hope of big profits later on.  As long as the losses stay in the current range, about 3% of overall DIS operating income, Wall Street won’t care.

my thoughts

I thought the news from DIS was very encouraging.  It sounds like economic energy is building in the US in a way that’s benefitting DIS but is not yet seen in the financials.  Recognition will likely come in the next quarter or two.  Success of IM2 and TS3 are expected, but will nevertheless prompt Wall Street to take a somewhat more favorable view of the DIS film business.  And if another one of DIS’s traditional films turns into a box office winner, so much the better.  I also think earnings will surprise on the upside as accounting oddities even themselves out.

Net Neutrality: this week’s appeals court decision

April 9, 2010 By in Current Market Thoughts, e-readers, Entertainment, Industry Analysis, internet, Publishing, Technology, Wireless Tags: , , , , , , , , , , Leave a comment

the Comcast lawsuit

Three years ago, the Associated Press responded to consumer complaints by running tests that showed that Comcast was slowing down access to peer-to-peer file-sharing services like BitTorrent, which allows users to swap large files, like movies.  Comcast first denied doing anything, but later said it acted because a small number of users were hogging bandwidth and slowing down access speeds for everyone else.

The Federal Communications Commission ordered Comcast to stop this, under “net neutrality” principles it had laid down in 2005.  Comcast sued.  Earlier this week, an appeals court ruled that the FCC had no legal authority to issue the order.  So, barring another appeal, Comcast has won.

What is Net Neutrality?

First of all, one should note that the name itself is a very clever, highly political choice, sort of like the Patriot Act or the Employee Free Choice Act.  Just as no one wants to be seen as opposing free choice or patriotism, it seems unreasonable to be against neutrality.  So opponents are already on the defensive, no matter what the actual concepts are that lurk behind the names.

FCC statements on net neutrality say consumers are entitled to:

–access all lawful content

–run any applications or services

–connect to the internet with any legal, non-harmful device

–competition among service, application and content providers

–disclosure of operating principles by ISPs

–no discrimination by ISPs against any legal content or applications.

two observations

1.  This is all jockeying for economic advantage.

On the one side, cable and telephone companies have spent billions building out internet networks, with at least vague imaginings of being able to operate the kind of “walled gardens” that Apple’s iPod and iPhone now run, and AOL did in the Nineties.  They don’t want to be reduced to being “dumb pipe” conduits earning a minimal return for transporting very profitable applications run by others.   But they suffer from the weakness of any capital-intensive industry (think:  container shipping or cement plants) that their capital is already sunk in the ground and can’t easily be retrieved.  So they are almost by definition price takers.

On the other, content and application providers are radically dependent on ISPs to deliver their products to consumers.  They wonder (fear?) what would happen if an ISP owned a service that competed with theirs–like Comcast when it takes control of NBC Universal.  Would, say, competing news services find their offerings delivered at slower speed than NBC’s?  Would content/application providers that didn’t link up with Hulu find themselves shunted onto the local track while more NBC-friendly competitors stayed on the express rails?

You might say that an ISP would be foolish to do this, but outside the most densely populated areas, what recourse do consumers have?  There’s no competing internet service to switch to.

At this point, this is mostly in the realm of “what if?”.  Other than the BitTorrent instance, there’s scant evidence that ISPs are acting on what may well be their secret fantasies.

2.  Almost everything that has been said about Net Neutrality is couched in negative terms–what ISPs are not allowed to do.  The other side of the coin has been pretty much ignored.  ISPs are allowed to sell different classes of service, with minimum quality of service guarantees.  And wealthy service providers (think:  Google) can maintain cutting-edge server networks of their own to support their products.  They can also pay ISPs to colocate their equipment with the ISPs to increase service speed.

So neither side is exactly the powerless “victim” of the other that its proponents would like to portray it as.

investment implications

1.  The Roberts family, which controls Comcast, are very shrewd businessmen.  Their attempt a few years ago to acquire Disney and its current agreement to buy an interest in NBC Universal illustrate what they think of the future of the IPSs (i.e., dumb pipe).  In the BitTorrent case, they had two options:  slow down service or add capacity.  The second would mean capital spending that wouldn’t generate any more revenue.  Whether you think Comcast did the right thing or not, it’s an indicator of the maturity of the business if option #2 makes no economic sense.

2.  The wired broadband networks have by and large been built with private money.  This suggests they shouldn’t be regulated as public utilities.  Even if that were possible, and net neutrality thereby assured, I don’t think anyone wants that.  The next step, I think, would be taxation along the lines of telephone services, raising the cost of internet service for everyone.

In theory, tax increases would get parceled out among consumers, ISPs and content providers according to their economic power.  But no one really wants to find out what that allocation would be.  And everyone except the government is worse off.

3.  Content providers want security but they don’t want regulation.  What do they do?

a.  They attack the “walled garden” that Apple has established by providing/supporting the creation of equivalent devices at lower prices.  The Google phone, the Chrome netbook or the $100 iPad-equivalent that Marvell recently displayed are examples.

b.  They promote the proliferation of alternative ways of internet access–WiMax, municipal free internet services.  The more alternatives a consumer has, the less able any one ISP is to take content-unfriendly action.  Also, an ISP would certainly hesitate to take action if that meant that a whole town or county or some other political entity were affected.  Doing so would invite adverse political consequences.

4.  How to invest?

I suspect a value investor would have a field day rooting through the cable companies and the traditional media companies, since many have already acted on their belief that these firms are the ultimate losers in the internet revolution.

That’s not what I do, however.  I continue to think that the designers of new devices, and of the key components that go into them, are the best bet.

Disney’s Alice in Wonderland: how important?

March 22, 2010 By in Current Market Thoughts, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , Leave a comment

Despite tepid reviews (52% from Rotten Tomatoes) and questions about how well integrated the 3-D is into the plot, Disney’s Alice in Wonderland has turned out to be a big box office hit.  Out about two and a half weeks, Alice has been the #1 film in the US for the past three weekends.  It has grossed $265 million in the US so far and another $300 million abroad, according to Box Office Mojo.  This compares with estimated production costs of $200 million.  (This contrasts sharply with DIS’s previous major release last November of The Princess and the Frog, which grossed $104 million in the US and $160 million abroad vs. production costs of $105 million.  It’s now in DVD sales.)

There’s no easy way to go from movie revenues to movie profits, for two reasons:

–the division of profits among the various parties–producers, stars, distributors–can differ widely from film to film, and

–the studios use project accounting for films.  This means at the outset they estimate total revenue and total costs, and allocate each proportionately as the money comes in.  Marketing, for example, is a major expense that comes mostly during the theatrical release period.  If the studio estimates half the revenue will come from DVD sales (that would be very high in today’s world), then only half the total marketing expense would be allocated against box office.  If, in contrast, the studio said DVD revenues would be zero (another unrealistic assumption), then all the marketing costs would be allocated against box office.

It seems to me that the contribution to operating profits of Alice will be north of $200 million for this quarter.  It will be interesting to see what the actual number is.

Alice will be followed by Ironman 2, the most anticipated movie release of 2010, which will debut during the June quarter.  IM2 will likely creating another blockbuster operating profit result.

The big issue for the just-revamped Disney movie business is, of course, that neither film has much to do with the new film management.  Alice was put in the pipeline by the old regime, and IM2 was bought with Marvel Entertainment.

Nevertheless, I think some of the positive glow from these films will rub off on the rest of DIS.  Investors will be somewhat more willing to believe that Disney’s movie business is back on the right track.  And they’ll probably be willing to extrapolate any nascent signs of recovery in the theme park business more quickly than they would otherwise.

For now, that probably doesn’t translate into outperformance when the market is going up.  But it will likely mean some protection on the downside, therefore outperformance when the market is weak.

Disney (DIS) upgraded; rises to a 52-week high on Thursday

March 7, 2010 By in Current Market Thoughts, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , Leave a comment

Jessica Reif Cohen, media analyst at Merrill Lynch, raised her recommendation on DIS from “neutral” to “buy,” saying the stock’s prospects are “skewed highly positive” and that DIS is “one of the most compelling equities” among media and entertainment stocks heading into fiscal 2011 (starts in October 2010).  This according to the Wall Street Journal. Ms. Cohen set a price target of $42 a share for DIS, which she expects to earn $2.45 per share next fiscal year.

The stock shot up 4.3% at the open to $32.86, a new 52-week high, before moving sideways for the rest of the session and closing at $32.57, up 2.94% for the day.  Friday, DIS added another 2%.

Why is this news? Continue reading →

Disney–waiting for the upturn; Dec 09 results

February 15, 2010 By in earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , Leave a comment

First-quarter results–up 15%

DIS reported its December-quarter (first quarter of fiscal 2010) earnings results on February 9th.  Excluding unusual items, earnings per share were $.47 this year vs. $.41 last year.  That’s a gain of 15% over the deep-in-recession performance of 12 months ago.

The investment case for DIS…

…assuming there is one (I own the stock, so I must think there is) rests on three ideas:

1.   ESPN continues to motor along in the US and is successful in expanding into the UK,

2.  the theme parks gradually recover, and

3.  the movie business straightens itself out and starts to make money again.

It would be icing on the cake if the ABC television network/stations stabilized, and/or if–in a reversal of twenty-five years of avoidance–customers started to show up at EuroDisney.  But these operations are small enough that all they really need to do is not get in the way too much.

How did the quarter stack up? Continue reading →