Disney's Earnings Were Not As Magical As Many Investors Were Hoping

By Jonathan Berr | November 08, 2013 AAA

Though Walt Disney (NYSE:DIS) became the latest media company to post better-than-expected earnings, they weren't good enough for Wall Street.

Shares of the Burbank, Calif.-based company, which have underperformed their peers such as Time Warner (NYSE:TWX), 21st Century Fox (Nasdaq:FOXA) and CBS (NYSE:CBS) over the past year, slumped nearly 3% in after-hours trading Thursday because of unexpected weakness in its Media Networks business. By mid-day Friday, the bulls managed to reverse the selling pressure and sent shares higher by 3.15%. The stock has gained about 38% since January, even as investors fretted about ”The Lone Ranger" bombing at the box office. The company has said it will take a write down of as much as a $190 million because of the critically disliked Western that stars Johnny Depp.

The parent of ESPN, Walt Disney World and Pixar yesterday reported net income in the most recent quarter of $1.39 billion, or 78 cents per share, an increase of 12% from $1.24 billion, or 69 cents, a year earlier. Revenue at the Burbank, Calif.-based company rose 7% to $11.6 billion, helped by an unexpectedly strong performance from its Parks and Resorts business. The earnings beat Wall Street's expectations for a profit of 76 cents on revenue of $11.4 billion. For a closer look at the numbers, click here.

Though hit movie and television shows help Disney's bottom line, what attracts investors to the house of Mickey are the company's Media and Networks business, which includes ESPN and the ABC television network, and Parks and Resorts, which includes theme parks such as Walt Disney World and the Disney cruise ships. Hit movies and television shows, as it's often been said, come and go. Unfortunately, the Media Networks business, Disney's largest, proved disappointing. Operating income at the division, fell 8% to $1.44 billion, as the company absorbed higher sports programming costs. It was the only Disney business that posted a profit decline. Revenue rose 1% to $4.9 billion. That was below the $5.26 billion expected by B. Riley analyst David Miller.

These results may be particularly worrisome since ESPN has long been a cash cow for Disney. It charges cable and satellite providers the highest fees of any channel and routinely generates huge television ratings. Though rival Fox Sports 1 recently launched and hasn't had much impact on ESPN yet, some investors may wonder whether that will change over the long run.

Disney's Parks and Resorts business was a bright spot thanks to rising attendance and guest spending. Operating profit surged 15% to $471 million while revenue jumped 8% to $3.71 billion. That matched the $3.7 billion forecast of Needham analyst Laura Martin. The Studio Entertainment, Consumer Products and Interactive divisions all posted gains in revenue. Unfortunately for investors, however, many of Disney's rivals had better quarters.

For instance, net income at Time Warner, the largest media company, rose 44% to $1.18 billion. On an adjusted basis, earnings per share rose to $1.01. Revenue at the parent company of Warner Bros. and CNN was little changed at $6.86 billion. 21st Century Fox saw its net income slump more than 40% to $1.26 billion, or 44 cents per share, in part because of the expenses it incurred for launching Fox Sports 1. Revenue surged 18% to $7.06 billion. Profit from continuing operations at New York-based CBS jumped 22% to $469 million, or 76 cents a share, as sales jumped 11% to $3.63 billion.

The Bottom Line

Disney's shares aren't particularly cheap and it remains unclear when things will get better for the company. Some have pointed to Walt Disney's $4.billion acquisition of Lucasfilm, the producer of the "Star Wars" films, as a potential catalyst for the stock. The company is adding "Star Wars" attractions to its parks. CEO Robert Iger announced yesterday that the first “Star Wars” film under its watch is going to be released in 2015. However, that may be too long time for investors to wait for a pay off.

Patronizing Disney's theme parks and watching the company's movies and television shows has been more enjoyable than owning the company's stock for many investors. It has underperformed its peers over the past five years. Unless the company blows away Wall Street expectations in the next few quarters, that trend will probably continue.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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