Disney Will Likely Beat Earnings Expectations Later This Week

| About: The Walt (DIS)

On Wednesday, February 5, Walt Disney Co. (NYSE:DIS) is scheduled to report results for its fiscal first-quarter, or the holiday quarter of 2013. The average Wall Street analyst's expectation for the world's largest entertainment company's earnings per share is $0.91, with predictions ranging between $0.84 and $0.97. This means even the most pessimistic analyst that covers Disney is anticipating about 6.2% year-over-year earnings growth for the quarter. Moreover, given Disney's often conservative forecasting, the company's results are likely to come in above guidance.

In the same quarter last year, Disney reported EPS of $0.79 cents on sales of $11.3 billion, which was a 5.2 percent revenue increase over the same quarter last year. Over the last several years, the company has put forth a series of shareholder pleasing reports that have been powered by broad strength, and especially increased theme park and even cruise ship tourism. Further, not only has Disney continued to grow the number of guests that come to its parks, but it has also continued to increase guest spending while at its parks. The company also routinely increases the cost of admission to its parks, and did so to start 2013.

The company's most profitable unit continues to be its television networks, which include ABC, ESPN and the Disney Channel, among many others. Several new and/or recently profitable divisions should help Disney continue its strong overall performance. For example, the company's interactive unit, which produces games and manages Disney's websites, has only been profitable for about one year, and should end up being one of the faster growing divisions in terms of revenue and earnings growth going forward, at least on a percentage basis.

Disney's film studio often has capricious results from quarter to quarter and year-to-year, but last quarter was likely a decent one. For example, it was the distributor of Iron Man 3, which had the fifth highest grossing box-office on record and which was made available for digital download and DVD purchase just before the start of the prior quarter. Additionally, it released Frozen in November, and the movie has already had a worldwide box office take of over $860 million. Disney also released Thor: The Dark World in November, which earned over $630 million. Beyond movie sales, it is likely that Frozen and Thor merchandise also did well last quarter, as the movies opened into the holiday gift-buying season.

2014 and the next few years should see continued and potentially even accelerating growth as Disney begins to monetize the assets it gained though acquiring Lucasfilm Ltd. for $4.05 billion from George Lucas, and most notably the Star Wars and Indiana Jones franchises. Shortly after making the acquisition, Disney announced that a third trilogy of Star Wars movies would be made, but the first of the three movies (or Episode VII) is scheduled for a 2015 release.

In addition to the third Star Wars trilogy, Robert Iger, Disney's CEO, indicated that the company would develop at least two additional movies that will be based on recognizable Star Wars characters. Han Solo would appear a likely candidate for a "solo" spin-off, as would the anti-Han that is Boba Fett. The company will likely provide some more details in the coming months, in addition to the probable marketing of its Disney product base and coming features.

Both Star Wars and Indiana Jones appear 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 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. Therefore, beyond the potential for Disney's film unit to profit, its consumer products and interactive units may actually generate more sales than the film from which they come.

Similarly, these franchises should help add a slightly older skew to the theme parks. Lucasfilm and Disney had previously collaborated to create Star Wars and Indiana Jones attractions for Disney's Parks and Resorts, so there was already an understanding of what could work, and likely also a significant amount of customer feedback regarding what to add.

The Lucasfilm purchase was likely the last of the big content acquisitions Disney will make in the near term. Between 2006 and 2013, Disney made multiple large acquisitions that substantially expanded the company's portfolio of franchises. First, Disney paid $7 billion for animation studio Pixar, which brought with it Toy Story and Cars, as well as a tremendous amount of technological expertise. In 2009, Disney acquired Marvel Entertainment for $4.2 billion.

Though many Marvel characters had then already been sold in a piecemeal approach to various other studios, Disney gained The Avengers, among several other characters. Before Disney bought Marvel, Sony's (NYSE:SNE) Columbia Pictures acquired the Spider-Man and Ghost Rider franchises, and 21st Centrury Fox (NASDAQ: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 rights to The Avengers. As part of the deal that was struck, Disney must pay Viacom's (NYSE:VIA) Paramount about an 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. A sequel is scheduled to be released in 2015. In the meanwhile, a sequel to Captain America, The Winter Soldier, is scheduled to be in theatres this Spring.

Before Disney acquired Pixar, it was majority owned by Apple (NASDAQ:AAPL) Co-founder Steve Jobs. 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. The recent Lucasfilm deal, included issuing approximately 40 million shares to George Lucas, which makes Lucas the second-largest non-institutional shareholder in Disney, with a stake worth about 2.2% of the company.

These deals show the importance movie studios like Disney and new era content providers like Netflix (NASDAQ:NFLX) 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 developed by Pixar and Industrial Light & Magic, Lucasfilm's special effects division. Similarly, LucasArts was a strong supplement to Disney's Interactive gaming unit.

Another possible change that Disney may make this year is the potential conversion from paying an annual dividend to paying it out in quarterly intervals. Disney usually announces and increases its dividend in early December. Disney is one of few U.S. companies that still maintains an annual dividend, and many anticipate that this will soon change to the more standardized quarterly method.

In late 2013, Disney performed will, along with the broader market. Much of Disney's strength was likely founded in its successful November movie releases. To the extent that this is the case, much of its recent move upwards may be in anticipation of a strong quarterly result. If this is the case, then Disney could sustain a strong sell off if it does not meet expectations. Nonetheless, the box office and probable merchandising success of these movies indicates that Disney will beat expectations later this week.

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.