Disney is currently firing on all cylinders, riding a ratings recovery at ABC, an above trend batting average at the studio, a cyclical rebound at theme parks and secular growth in cable programming. However, investors need to have an intuitive sense and should be wary of reversion to the mean, particularly in the hit-driven entertainment business.
Said another way, with DIS now firing on virtually all cylinders, there is now (in a counter-intuitive sense) greater downside (as opposed to upside) earnings risk. For example, ABC PT entertainment ratings are flattish excluding MNF last year and other sports. In 2006, Disney generated U.S. box office of $79 million per film, nearly double its average since 2000. For theme parks, attendance is now well past it prior cyclical peak and appears to be decelerating to 3% steady state growth. You should note that park margins should benefit from a 40% decline in pension costs.
The one major business line that is expected to accelerate in 2008 should be cable networks given a more moderate increase in NFL amortization. Also, target demo ratings, which were up 7% on a revenue weighted basis in 2006, set the stage for continued ad revenue growth.