Can Disney Earnings Escape Traps of Big Media? (DIS, TWX, NWS, CBS)

November 6, 2008 by Douglas A. McIntyre

Disney_logoThe Walt Disney Co. (NYSE: DIS) is set to report earnings right at the close of trading today.  The Thomson Reuters (First Call) estimates for the media giant and DJIA component are $0.49 EPS and $9.34 billion for this last Q4 period.  Estimates for next quarter (fiscal Q1-2009)are $0.59 EPS and $10.53 billion in revenues.  Unfortunately, there are many other issues to consider here than the past quarterly earnings report today.

We have seen earnings from Time Warner Inc. (NYSE: TWX) and News Corp.(NYSE: NWS) just yesterday.  Neither were greeted with cheers.  TimeWarner stock fell over 6% yesterday and shares are down another 3%today.  The soft earnings and the weak guidance because of televisionand advertising revenues coming down sharply has News Corp. stock down16% at $8.30.  Amazingly enough, that is not actually a 52-week low.Sumner Redstone’s CBS Corp. (NYSE: CBS) has also been under severepressure as shares have lost roughly one-quarter of their value sincelast month before media earnings hit and before Redstone "mistakenly"was forced to sell shares.  Shares are down 40% from October 1.

The issue at hand is that Disney has been the best and most insulatedof all the media companies. The fact that shares are "only" down about33% from their highs is a serious win in this crummy recessionaryenvironment.  What we want you to brace for is this: NO ONE IS IMMUNE!NO ONE!  Analysts have only taken down their earnings estimates from$0.51 to $0.49 EPS over the last 30 days or so.  More importantly,estimates for the December quarter have only come down by $0.01 to$0.59 EPS.  We really do not know what cloud these analysts have theirhead in, and we think they may have their head stuck up somewhere elsebesides the clouds.

Disney has ABC, ESPN, Disney, Club Penguin, and many other iconicbrands which have tentacles in old media, virtual media, new media, andphysical presence entertainment.  It will make it through thisenvironment.  But in no way is it immune.   This stock has lost roughly20% since October 1.  But it has held up much better than peers.  Ifyou have to own a single media stock, the Mouse House and HannahMontana owner will be the one you want to own.  But the question looms:WHEN?  Things are very bad in the economy.  Unless a giant rapid directstimulus check round 2 package comes from Uncle Sam in time forChristmas, then you can count on the Christmas season number one giftbeing lumps of coal.  Things are so bad for the consumer that we’d evenpropose that Hannukah be taken down to eight days from four days thisyear to take the pressure off the consumer.

Unless our data figures managed to not get updated, the analyst numbersjust seem way too high.  The revenue estimates would mean that theMouse House grew revenues from 2007 calendar levels by $401 million inthe last quarter and would still post growth of almost $100 million forthe coming quarter.  Those are not ridiculous numbers, but there is oneother agent that will have worked out grossly different for Mickey andfriends:  the greenback.  The US dollar strength means that the companywill have earned less net monies from its overseas operations this lastquarter as a given, and it will impact the Christmas quarter as well.

How many advertisers have brought down their spending? From the looks ofit, almost all of them.  How many families can take their kids to Disneylandor on a Disney Cruise compared to last year?  We will not know that answer until after theearnings, but that number has to be far fewer than before.

From the looks of options prices today, it seems that options tradersare only bracing for a move of about $1.10 to $1.30 in eitherdirection.  With such a High VIX and with the markets this volatile, wewon’t be shocked if the reaction in either direction is much more thanthis.  The 50-day and 200-day moving averages are far enough north oftoday’s stock price that there is no long-term read here.  In theshort-term, Disney shares have used $26.00 as resistance and $22.00 assupport.  The 52-week trading range is $21.25 to $35.02. 

So far we have only shown you the bad things in the economy which willbe acting against Disney.  But there actually some great things here atDisney which we’d be silly to not recognize.  If the earnings estimatesare attainable then the P/E ratio is actually under 10.0.  That doesnot happen very often.  The stock market has been hit so hard evenafter the recent pre-election bounce that much of this bad news andweak economic expectation has to be factored in.  Over the last 5-yearperiod we have not ever seen this stock sell off by such a largepercentage in such a short period.  Over the time a 20% pullback gaveyou a gift entry point where your share gains could have been 30% to50% depending upon your holding times.  This company is an earningspowerhouse with brand-leader status in many categories.  Its clientsare aged 0 to 90 and the income range of its clients is from the poorall the way up to the three-comma net worth crowd.  So there are good things atwork here.

So here are our "hopes" for today.  Hopefully we are just being way toopessimistic and hopefully this company is more defensive than others.Hopefully the drop seen in the shares and the low P/E already reflects this.  Hopefullyour data we have seen on the lack of analysts cutting estimates justhas not been updated at the source.  Hopefully the "efficient markettheory" prevails to the point that the market already factors in goodnews and bad news for known events ahead of time.  Hopefully thefirings on Main Street and the crummy jobs numbers won’t be as bad aswe expect.  Hopefully the much lower oil prices means that it isn’t outof the norm for a family to drive 200 miles to theme parks for theweekend.  Hopefully ad monies for sports haven’t come down as much asthey have for other media.  Hopefully consumer credit will come up, andhopefully we’ll see another round of free money checks go out fromUncle Sam to Joe public for consumer spending in time for Christmas.The problem here with all of these hopes is that history has shown"hope" is one crummy investment strategy.

Jon C. Ogg
November 6, 2008