Entertainment and media conglomerate The Walt Disney Company (DIS – Free Disney Stock Report) posted mixed results for the first quarter (fiscal year began September 30, 2012.) Even though the top line expanded 5% to, $11.341 billion, the bottom line slipped roughly 4% year-over-year, falling eight pennies short of our estimate, to $0.77 a share. Still, the investment community liked what it saw and bid the shares up 3% in early morning trading.
We have included charges related to the Celador litigation and the Hulu equity redemption, as well as gains from the sale of its 50% interest in ESPN STAR Sports and a tax benefit related to foreign earnings in the prior year. Without these impacts, share net would have come in at $0.79.
The company saw growth across most of its segments, save for its Studio Entertainment division. This unit suffered from declining home entertainment and theatrical distribution. The former was hurt by difficult year-over-year comparisons, and the latter was pressured by higher marketing and distribution expenses for Lincoln and Monsters Inc. 3D.
Nevertheless, Disney has a hefty film roster, including Oz - The Great and Powerful, Ironman 3, The Lone Ranger, and Monsters University slated for release in the next few quarters, which ought to provide some lift to Studio results. What's more, the company completed the Lucasfilms acquisition during the last quarter, and we believe that upcoming episodes in the Star Wars saga (the seventh is scheduled for 2015) and other stand-alone films will contribute over the long haul.
Income at its Media Networks climbed 2% during the December period. Much of these gains stemmed from its Broadcasting division, owing to higher advertising and affiliate revenues, spurred by contractual increases. But, even though ad rates ticked up at ESPN, the sports network was hard hit by rising operating and programming costs. As a result, earnings at its Cable Networks slipped 2% in the interim. Looking ahead to the second fiscal quarter, we envision higher programming costs at ESPN will pale in comparison to better advertising rates and affiliate fee contracts.
Higher guest spending at Parks and Resorts helped support results at that segment. Revenues from its domestic parks helped offset rising costs in Disney's international properties. (Expenses there were driven by costs related to guest services and labor-cost inflation.)
Disney Interactive returned to profitability during the quarter. The company received a positive reaction to its announcement of new platform Affinity, scheduled to be released this summer. This video-game platform will allow users to create stories with Disney and Pixar characters.
Lastly, Disney's Consumer Product arm performed nicely in the December period with the help of merchandise licensing and better results from the retail division in Japan and good online sales.
Looking forward, Disney may continue to face higher operating expenses across several of its business lines in the next few months. Still, we think good news from its strong brands and businesses will overshadow those pressures.
The media conglomerate has scaled back capital expenditures (following an expensive expansion at its Parks and Resorts), but we believe it will continue to strategically invest in itself. It may eye additional acquisitions, or spend on technology to complement its current offerings. Likewise, Disney has maintained its share-repurchase authorization, and ongoing buybacks ought to help boost per-share comparisons going forward.
All told, we think the media conglomerate will register decent results this year. Even so, we have shaved a dime from our full-year share-earnings expectation. In sum, we believe profits will advance 5%-10% to $3.35 a share in fiscal 2013.
About The Company: The Walt Disney Company operates Media Networks such as ABC and ESPN, and Studio Entertainment. Its world famous parks and resorts include Disneyland, Walt Disney World (Magic Kingdom, Epcot, and Disney’s Hollywood Studios), while the company earns royalties from Tokyo Disneyland and manages Disneyland Resort Paris and Hong Kong Disneyland. It also operates a cruise line and Consumer Products and Interactive Media segments. ABC was acquired in February, 1996, Pixar in May, 2006, and Marvel in December, 2009.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.