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Disney (DIS)
Disney Plugging Through the Recession
Media conglomerate Disney reported earnings after the bell yesterday and even though there were a lot of red numbers, it basically performed as well as it could in the current environment. A company such as Disney, that survives on ad dollars and discretionary consumer spending on movies, theme parks etc. is bound to be especially sensitive to a recession. Third quarter net income fell 26% from a year earlier, it came in a penny above expectations and the revenue number was 7% lower at $8.6 billion while the street was expecting $8.83 billion. Disney will continue to struggle for the next few months but it has enough of the right chips in place to benefit extensively from an economic recovery.
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Combing though the numbers a little more shows that Disney saw weakness across all it businesses from the theme parks (income down 19% to $521 million) to the movie studios (the division lost $12 million) to consumer products (as the movies weren't successful enough to generate blockbuster merchandise sales) to the television properties (where soft ad sales combined with higher programming costs made it a tough quarter for the executives at ABC and ESPN). The broadcast unit, headlined by ABC, saw a 34% fall in income even though ratings fell only about 10%. The cable properties, led by ESPN, did better as they saw only an 8% fall in operating income.
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These results are better than those for the previous 3 months and that is mostly due to the economy becoming less soft. JP Morgan downgraded the stock today because of concerns over ESPN, ABC and their ability to bring in advertising revenue. That might be taking a too pessimistic view of things. The broadcast business is in a long-term secular decline, the 4 major networks have more and more trouble with the upfront ad sales season each year and viewership is on the decline. So not too much can be expected out of ABC. But ESPN is a bona-fide best of breed operation. It has no other viable competitor and is well-managed across the radio, web and television platforms. The next plan is to go hyperlocal and put local newspaper sports editors out of business.
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Disney's biggest long-term challenge will be to make sure that it continues to get adequately compensated for its content. Online video is becoming bigger and bigger and though Disney gets to play in that market a little bit with its stake in Hulu, Disney and most media companies don't yet have a cohesive strategy on how to protect content without alienating consumers. Despite detractor's claims that long-term, all content will be free and that there will be no way to monetize it because people expect it to be free, there will always be a market for quality content and most consumers will pay for premium content. Disney's job is to keep producing such content across its movie and television businesses but maybe in a more cost-effective manner and as mentioned earlier, figure out a way to get compensated for it without creating unreasonable barriers for the end-user.
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Over short term, your level of bullishness on Disney should probably depend on your views on how fast the economy is going to recover. The latest GDP numbers indicate that the recession is easing but how steep the pace of recovery is going to be remains uncertain. A stronger economy will increase the traffic at the theme parks and margins will rise because Disney will cut back on some of the aggressive promotions, and the advertising supported businesses will become healthier. But either way, Disney could do a better job controlling programming costs and putting forward a stronger movie lineup as the latter has a trickle down impact on its various businesses.
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