The Walt Disney Company (DIS), a diversified entertainment company, recently posted fourth-quarter 2010 results that missed the Zacks expectations. Quarterly earnings of 45 cents a share missed the Zacks Consensus Estimate by a penny and slipped 2% from 46 cents earned in the prior-year quarter.
The fall in the bottom line was due to revenue declines across Media Networks, and Parks and Resorts divisions. However, Disney hinted that for first-quarter 2011, the advertising revenues at both ESPN and TV stations are trending up in double-digits compared with the prior-year, and added that it is also witnessing a rise in domestic hotel reservations by about 5%. On the heels of the news, the stock grew slightly by 1.7% or 62 cents to $36.55 in after-hours trading on Thursday.
The Zacks Consensus Estimate had remained stable prior to the earnings announcement, in spite of 6 out of 27 analysts following the stock revising their estimates upward and 3 analysts lowering their projections in the last 30 days. In the past four quarters, Disney has outperformed the Zacks Consensus Estimate in the range of 6.7% to 20.5%.
On a reported basis, including one-time items, quarterly earnings came in at 43 cents a share, down 9% from 47 cents delivered in the previous-year quarter.
Total revenue in the quarter fell marginally by 1% to $9,742 million from the year-ago quarter, and also fell short of the Zacks Consensus Revenue Estimate of $9,924 million. Total segment operating income also declined 7% to $1,717 million.
Behind the Headline
Media Networks revenue fell 7% year over year to $4,414 million due to revenue declines across Cable Networks (down 6%) and Broadcasting (down 7%). Segment operating income plunged 18% to $1,217 million. Cable Networks’ operating income plummeted 28% due to the recognition of less deferred revenue of net $354 million at ESPN, rise in programming and production costs, and one less week of operation. Operating income at Broadcasting soared to $147 million from $2 million in the year-ago quarter reflecting lower programming and production costs at the ABC Television Network along with increases in advertising revenue and net affiliate fees, partially offset by higher pension and post-retirement medical expenses. Management indicated that a fall in Broadcasting revenue was due to lower sales from ABC Studios productions.
Parks and Resorts revenue decreased slightly (by 1%) to $2,819 million. Segment operating income also dropped 8% to $316 million, hurt by increased labor costs at domestic resorts and a fall in sales at the Disney Vacation Club, partially offset by a rise in guest attendance at its international resorts – Hong Kong Disneyland Resort and Disneyland Paris.
Studio Entertainment revenue jumped 6% to $1,591 million, and operating income grew substantially to $104 million from a loss of $13 million in the prior-year quarter. The growth reflects an increase in worldwide theatrical distribution owing to robust performance of Toy Story 3 in international markets.
Consumer Products revenue climbed 13% to $730 million and segment operating income surged 22% to $184 million, reflecting increased licensing revenue on the heels of Toy Story and Marvel merchandise, improved performance at Disney Stores globally and growth at publishing driven by the Marvel titles.
Interactive Media revenue for the quarter surged 20% to $188 million and posted an operating loss of $104 million, reflecting an improvement of 9% over the prior-year quarter, driven by increased revenue from video games sales, primarily Toy Story 3, and a rise in the number subscribers at the company’s mobile phone service operation in Japan.
Other Financial Details
During the quarter, Disney generated free cash flow of $1,409 million, up 27% from the same quarter last year. The company ended the fourth quarter with cash and cash equivalents of $2,722 million, total borrowings of $12,480 million and shareholders’ equity of $37,519 million, excluding a non-controlling interest of $1,823 million. Capital expenditures in fiscal 2010 were $2,110 million. For fiscal 2011, management expects capital expenditures to increase by approximately $1 billion.
During fiscal 2010, Disney repurchased approximately 80 million shares for approximately $2,669 million. The company notified that so far in fiscal 2011, the company has bought back approximately 11 million shares, aggregating $392 million.
Currently, we have a Neutral rating on Disney. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, correlates with our long-term recommendation.
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