On Tuesday, Disney (DIS: Charts, News, Offers) posted strong earnings, putting an end to the relentless rumors that economic turmoil had dampened its ability to make money from its core entertainment businesses. Nevertheless, shares slid over 10% during Wednesday trading as investors complained that the company’s guidance wasn’t strong enough to address macroeconomic concerns. For the quarter ending on July 2, Disney posted profits of $1.48 billion, or 77 cents per share, on revenue of $10.7 billion. This marks an 8% rise in profits and a 7% increase in revenue from the same period last year, and soundly beats analysts’ estimates of 73 cents per share on revenue of $10.4 billion. Excluding special charges, including layoffs at its movie studio, adjusted earnings came in at 78 cents per share, beating earnings by 5 cents. Despite the financial strength of the Dow component, shares have fallen with the broader market last week, and its depressed price may offer investors a good entry point to the stock, which has an average analyst price target near $50. The company’s positive earnings were driven by its theme parks and television networks, which offset flat performance at its movie studio.
Daily Chart
Disney’s theme parks are considered a bellwether for the economy. Its attendance coincides with the discretionary spending of the middle class, which has repercussions throughout the rest of the retail and entertainment markets. Operating profit at its parks increased 9% to $519 million, and its revenue rose 12% to $3.2 billion. Disney attributed the gain to price increases on sustainable volume at its hotels and theme parks. Its theme parks division was also aided by the first full quarter of operation of its $900 million cruise ship, the Disney Dream. The Easter travel period also boosted theme park revenue. Attendance at Disney’s two American parks – Orlando and Anaheim, increased a stale 1%. However, the average expenditures per guest increased 8%, in all categories, including tickets, merchandise and food. The same shift occurred at its hotels – with room occupancy declining a percentage point to 81% – but its per-room spending, which includes the nightly room rate, increased by 14%. For the current quarter, hotel bookings are lagging by 2% behind last year’s numbers, but room rates have also been increased by a mid-single-digit percentage. This lower-volume, higher-margin shift assures investors that CEO Bob Iger’s strategy of sacrificing volume for pricing power has been largely successful.
Iger also noted that Disney will shift back into a high-volume, low-margin strategy should the economy slip into a dreaded double-dip recession. Iger believes that the necessity of such as plan will eventually be revealed through the volume of its upcoming holiday bookings. Of its international theme parks, Disney posted both higher attendance and spending in Hong Kong, but experienced declines in Paris and Tokyo, due to economic turmoil and the March 11 tsunami, respectively. Disney’s success in Hong Kong bodes well for its Shanghai theme park, slated to open in 2016.
As for Disney’s largest business segment, media networks, which is currently valued at 61% of the stock’s price, operating income increased 11% to $2.1 billion, and revenue rose 5% to $4.9 billion. The Disney media networks currently include ESPN, ABC, A&E, Lifetime, The History Channel and the Disney Channel, among others. Of these, ESPN is the biggest earner, and its success is critical to Disney – analysts currently value ESPN as 28% of the stock price. ABC was also able to decrease its programming costs and increase advertising revenue.
Unfortunately, Disney’s movie studio, which was responsible for sinking the stock last quarter with the abysmal “Mars Needs Moms,” disappointed investors. Operating profit at its movie studio decreased 60% to $49 million on flat revenue at $1.6 billion. Pixar’s “Cars 2″ and Marvel’s “Thor” failed to match the performance of “Toy Story 3″ and “”Iron Man 2″ from the previous year. The studio division cut 5% of its workforce in mid-June to realign its distribution and production channels. The company has signed a distribution agreement with Dreamworks (DWA: Charts, News, Offers), and has also been shifting its movie production unit to Marvel’s in house studio, which has enjoyed enormous success from its Iron Man, Hulk, Thor and Captain America franchises. While its primary summer films have been met with an average box office response this summer, its Marvel and Pixar films have been wildly successful worldwide. Disney’s films have helped promote its merchandise, and the popularity of the company’s “Cars 2″ and Marvel properties drove improved earnings and revenue in its consumer products business. Operating income in its consumer merchandise segment increased 32% to $155 million while revenue rose 13% to $685 million.
Another sore spot for the company is its interactive media segment, which grew revenue at 27% to $251 million, but incurred a widened loss of $86 million for the quarter. Disney attributed the loss to its recently acquired Playdom online games business. Playdom specializes in social networking games, popular on Facebook and other sites, but it’s a far cry from the social gaming giants Zynga and Electronic Arts’ (ERTS: Charts, News, Offers) Playfish. However, the company was quick to point out that sales of its console games actually improved.
The sell-off on Wednesday, the worst single day plunge for Disney since 2001, was largely unwarranted, with bearish analysts claiming the same reasons – a mixed earnings report and unclear macro-economic forecast – both of which had already been anticipated. Shares of Disney should snap back relatively quickly once this roller-coaster market stabilizes, and the lower $30s should be considered an extremely attractive entry point for new investors.
Other News About DIS
Disney Falls Most Since 2001 on Spending
Disney posts its biggest single day drop in a decade – is it time to buy?
Disney Goes With The Flow: Beats On Higher Ad Rates, Solid Theme Park Profit
On the surface, Disney’s earnings look excellent – but analysts (as usual) aren’t impressed.
Other Stocks in the News
General Motors Earnings Estimates Increased by Citigroup Analysts
General Motors gets price targets north of $40 – so why is this stock still in the dumps?
Is DuPont the Right Stock to Retire With?
Analysts believe that DuPont is valued attractively after the market bloodbath.
Copyright 2011 by Investorguide.com, Inc. Investorguide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary, and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. One WebFinance Inc. employee, other than the author of this issue, owns shares in DIS.
The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA Investorguide.com, Inc.) or its employees responsible.
Other relevant articles you may like
Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
