Disney Reports Strong Results, With Years Of Tailwinds To Come

| About: The Walt (DIS)

On February 5, Walt Disney Co. (NYSE:DIS), the world's largest entertainment company, reported earnings for its fiscal first-quarter, or the holiday quarter of 2012, that were above the average Wall Street analysts' estimates. The company's better than expected results were powered by broad strength, including increased tourism at its theme parks and on its cruise ships. Attendance at U.S. parks increased by four percent, while guest spending increased 6 percent. Additionally, Disney reported that its interactive unit had its first-ever profitable quarter last quarter.

According to Disney, the company's profit for the prior quarter came in at $0.79 cents on sales of $11.3 billion, which was a 5.2 percent revenue increase over the same quarter last year. The entertainment company's profit from its interactive, theme park and ABC broadcast segments was partly offset by lower earnings from its film and cable TV units. Though Disney's net income was better than expected, it still declined about 5.6 percent to $1.38 billion or $0.77 per share, from $1.46 billion or $0.80 cents the prior year. Much of the difference is related to reductions revenue and profit from the company's film studio.

The company's interactive unit, which produces games and manages Disney's websites, posted income of $9 million. Disney first began breaking out its interactive unit's results in 2009, and last quarter was the first time since doing so that the interactive unit recorded a profit. Last year the unit lost $28 million.

Disney's interactive unit looks likely to continue growing. Earlier this year, Disney closed the Junction Point video-game operation in Texas to reduce the unit's costs. The unit is also now investing in Infinity, a new video-game system that Disney unveiled last month. On the report's conference call, Robert Iger, Disney's chairman and chief executive officer indicated that there was strong retailer interest in the product, and that Infinity revenue should hit the books in the third quarter.

Disney's largest and most profitable unit continued to be its television networks. There, operating profit increased by two percent to $1.21 billion. The company's flagship network station, ABC, recorded a 16 percent gain, while cable income declined two percent due to greater programming expenses. In total, Disney's television Revenue increased by seven percent, with some of the healthiest cable growth coming from both the Disney Channel and ESPN.

Disney's' worst performing unit compared to the prior year was probably its film studio, where profit declined by 43 percent to $234 million. The decline was due to reductions in both theatrical and home entertainment businesses. Nonetheless, the film studio maintained its profitability, and has numerous films slated to be released in 2013. Moreover, profit at the company' s consumer products unit, which primarily sells licensed character products from recent movies, increased by 11 percent to $346 million.

During the prior quarter, Disney also reached an agreement granting Netflix (NASDAQ:NFLX) exclusive streaming rights to its movies, starting in 2016. The multi-year contract provides Netflix, the world's largest online video service, with the rights to movies from the operations of not only Disney, but also its subsidiary operations such as Pixar and Marvel, as well as its recent Lucasfilm acquisition.

On October 30, Disney announced that it is acquiring Lucasfilm Ltd. for $4.05 billion from George Lucas, the sole owner of his namesake production company. This deal brought with it the Star Wars and Indiana Jones franchises, which are two of the most successful movie franchises in film-making. Disney also announced that a third trilogy of Star Wars movies shall be made, with the first of the three movies, an Episode VII, scheduled to be released in 2015. Lucas will be a creative consultant on the new Star Wars films. This news should be positive for both Disney investors and Star Wars fans.

In addition to the third Star Wars trilogy, Robert Iger indicated that the company would develop two additional movies based on recognizable Star Wars characters. Han Solo would appear a likely candidate for the main character in one such a 'solo' spin-off.

Star Wars appears capable of generating income for almost all of Disney's key units. The Star Wars films have generated over $4 billion in worldwide ticket sales, but the Star Wars franchise is estimated to have generated over $27 billion in total revenue. That total includes approximately $12 billion in toy sales, $3.75 billion in home movie sales and $2.9 billion in video game revenue. This equates to probable coming Star Wars related strength within Disney's film, consumer products and interactive units. Lucasfilm and Disney had previously collaborated to create Star Wars and Indiana Jones attractions for Disney's Parks and Resorts, and it should be expected that more such attractions are forthcoming.

In 2006, Disney paid $7 billion for animation studio Pixar, adding Toy Story and Cars. Then in 2009, Disney acquired Marvel Entertainment for $4.2 billion, adding The Avengers and many other remnants of Marvel's original arsenal of characters and content to Disney's library. Given these two prior price tags, the price paid for Lucasfilm appears a potential bargain.

Moreover, the $4.2 billion price paid for Marvel was only for parts of it. Some of Marvel's content had already been sold off in piecemeal form, with Sony's (NYSE:SNE) Columbia Pictures owning the Spider-Man and Ghost Rider franchises, and News Corp's (NASDAQ:NWS) and (NASDAQ:NWSA) Fox owning X-Men and Fantastic Four, among others. Marvel actually had to reacquire some characters before selling to Disney, including The Incredible Hulk and Iron Man, and even The Avengers. Further, Disney must pay Viacom's (NYSE:VIA) Paramount an approximately 8% royalty on The Avengers. Disney's first related film following that acquisition, Marvel's The Avengers, generated over $1.51 billion in worldwide ticket sales last year, making it Disney's highest grossing film and the third highest grossing film ever made.

Pixar was majority owned by Apple (NASDAQ:AAPL) Co-founder Steve Jobs, and the 2006 acquisition gave Mr. Jobs a 7.4% stake in Disney. The trust that now holds those shares is now the largest Disney shareholder. In the Lucasfilm deal, George Lucas is the sole owner and part of the price was paid by issuing approximately 40 million shares to Lucas, which makes Lucas the second-largest non-institutional shareholder in Disney, with an approximately 2.2% stake in the company. Over the next two years, Disney plans to repurchase an amount of shares equal to the approximately 40 million issued to Lucas.

These deals show the importance movie studios like Disney and new era content providers like Netflix are placing on premium content that is broadly appealing to both children and adults. Moreover, Disney is likely to benefit from the integration of technology independently developed by the Pixar and Industrial Light & Magic, Lucasfilm's special effects. Similarly, LucasArts will likely become a strong supplement to Disney's Interactive gaming unit.

All in all, Disney has set itself up to have a strong next several quarters and years, with the potential to release numerous blockbuster films that should support the company's merchandising and theme park advancement. Within the next two quarters, Disney is scheduled to release movies including Oz (scheduled to be released on March 8, 2013), Monsters University (scheduled to be released on June 21, 2013) and The Lone Ranger (scheduled to be released on July 3, 2013). Additionally, Disney is expected to release another Thor movie, Thor: The Dark Worlds, in late 2013, and Iron Man 3 should be released in the United States on May 3, 2013. Nonetheless, its next round of true blockbusters may not come out until 2015, when Disney will release both the next Star Wars film and The Avengers 2.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , Entertainment - Diversified, Earnings
Problem with this article? Please tell us. Disagree with this article? .