Do You Doubt the Mouse?

By Cristin McGinnis - February 8, 2012 | Tickers: CMCSA, NWSA, TWX, DIS | 0 Comments

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The Walt Disney Company (NYSE: DIS) announced 2012 first fiscal quarter earnings February 7th after the closing bell. Expected earnings were .72, which Disney beat, coming in with earnings per share of .80. Revenues of 10.8 billion however, came in below expectations of 11.2 billion, causing DIS to fall 1.4% to $40.40 in extended trading. If you exclude studio revenues (Disney really wishes we would!), then revenues came in at a positive 4%. And not to be overlooked- overall DIS has risen 9.3% this year

Interesting, let us look a little closer at the earnings report. Year-over-year net income grew 12% from 1.3 billion to 1.46 billion. Got it. Sales grew .6% from 10.72 billion to 10.8 billion. Check. Operating income was up 11%, cash from operations was up 55%, and free cash flow turned positive from a negative 94 million to a positive 1.1 billion. Hmmm, food for thought. So who is driving the Disney bus forward, and what may we look forward to? ESPN is of course the star athlete, coupled with the strength of the Disney brand extending from cable networks to theme parks.

The key factors to look for as an indicator of future earnings now are of course ad revenue and hotel occupancy. Disney Channel ad revenue was up due to international subscribers, but ESPN ad revenue was flat. Overall hotel occupancy was flat, yet booked rates are up and park revenues have increased due to strong attendance and higher rates; a definite quandary.

Which leads to the overall driver of the Mickey machine - it is DISNEY! No matter where they come from, people pay for the Disney brand. The Disney Channel holds the top 5 channels for ages 2-11. Disney XD, whose target audience is young boys, grew 11% this year and hopes to increase revenues through the maximization of the Marvel name. The newly launched Russian Disney channel has reached over 100 million households and continues to grow. Likewise, the acquisition of India’s UTV allows for the creation of at least 9 young audience niche channels, accessing a huge population. One cannot forget that recently Disney signed a 10-year contract with Comcast (NASDAQ: CMCSA) as well to expand their multi-channel business model and grow affiliate revenue.

Similarly, there are talks that Disney is partnering with Univision Communications to create an all-news channel targeted at 2^nd and 3^rd generation English-speaking Latinos. This could bring them in touch with a large emerging niche market, but competition looms. CNN, FOX, and MSNBC are all looking at creating similar channels targeted at Hispanics.

So there is possible growth opportunity in Disney, but how do they stack up to the competitors? 

News Corporation (NASDAQ: NWS) 

Time Warner Inc. (NYSE: TWX) 

Time Warner has a smaller Market Cap, larger EPS, and lower P/E. Disney has the higher PEG, but let’s recall the strength of the Disney brand and their adventures into foreign territory.

So what conclusion can be drawn? Disney is down for not meeting revenue expectations. Second quarter results are historically low as well, not including the revenue knock that will take place for the Disney Fantasy cruise ship. Yet Disney is on the way up; cash flows are solid, attendance of theme parks is on the rise, cable networks remain a continuous source of revenue, and Disney global branding remains strong.  Should you buy Disney while they are down? In my opinion, yes.

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