Disney: The magic is back
Walt Disney reports second quarter profits that beat analysts' estimates. Stock gains after-hours even though sales were a bit lower than expected.
By Paul R. La Monica, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - Walt Disney, one of the world's largest media companies, reported better than expected fiscal second-quarter earnings Tuesday thanks to strength in its network TV and cable business. But revenues were a bit lower than analysts were hoping for due to sales declines in the company's film studio and consumer products businesses.

Disney reported earnings of 37 cents a share, a 19 percent increase from a year ago and well ahead of the Wall Street consensus estimate of 31 cents a share. This marked the fourth consecutive quarter in which Disney's profit surpassed analysts' expectations by a wide margin.

Disney completed its merger with Pixar on May 5, officially bringing in Mr. Incredible and others to the fold of wholly-owned Disney animated characters.
Disney completed its merger with Pixar on May 5, officially bringing in Mr. Incredible and others to the fold of wholly-owned Disney animated characters.
Magical stock: After a slump in late 2005, shares of Disney have surged this year.
Magical stock: After a slump in late 2005, shares of Disney have surged this year.
Wall Street loves what CEO Robert Iger has done for Disney. The company has reported better than expected earnings in each quarter since he took over as CEO last year.
Wall Street loves what CEO Robert Iger has done for Disney. The company has reported better than expected earnings in each quarter since he took over as CEO last year.
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But revenue growth was lackluster. Sales came in at $8.03 billion, only 3 percent higher than the same period a year ago and below the consensus forecast of $8.18 billion. It appears that the bulk of the shortfall was due to weak results in the movie business.

Investors shrugged off the sales miss, however. Shares of Disney (Research) were up nearly 1.5 percent in after-hours trading, according to Inet. The stock gained 2.7 percent in regular trading on the New York Stock Exchange Tuesday, hitting a new 52-week high in the process.

"I'm not sure if the market cares about the studio results," said Laura Martin, an analyst with independent research firm Soleil -- Media Metrics. "They did come in a bit below expectations, but people expected that because of tough comparisons."

After a tough year in 2005, Disney has been one of the better performing stocks in the Dow Jones Industrial Average this year, rising more than 23 percent so far in 2006. The stock has outperformed other major media rivals such as Time Warner (Research), News Corp. (Research) and Viacom (Research) thanks to healthy ratings at its ABC television network and a recovery in theme park attendance. (Time Warner owns CNNMoney.com.)

"[Disney's] networks are strong and parks are still strong which is a mild surprise. We're not seeing any problems with gas prices," said Joe Bonner, an analyst with Argus Research.

To that end, Disney chief financial officer Tom Staggs said during a conference call with analysts Tuesday that the theme park business is continuing to do well, and that he did not expect rising gas and oil prices to keep people away from the parks.

"We would not expect gas prices to have a meaningful impact on results this summer," he said, adding that gas prices would have to rise even further and hurt consumer confidence before Disney's theme park business would be affected.

And despite the weak results for studios in the second quarter, there is growing optimism about the company's summer film slate. Disney completed its purchase of long-time animated studio partner Pixar on Friday.

Iger upbeat about TV and movies

The latest Pixar film, "Cars," will be released on June 9 and many box office experts expect the movie to be a huge hit. Disney will also be releasing a "Pirates of the Caribbean" sequel this summer. The first "Pirates" movie was a wildly successful surprise blockbuster and hopes are high that the second movie will also be a big smash.

During the conference call, Disney chief executive officer Robert Iger said that the company expected both movies to do well at the box office.

Iger also said that Disney would continue to experiment with new business models in the media business. Disney has been one of the more innovative media companies when it comes to finding new ways to showcase its programming and content. To that end, Disney was the first network to begin selling downloads of prime time TV shows through Apple's (Research) wildly popular iTunes store.

Earlier this month, Disney also began offering free streams of ABC shows such as "Desperate Housewives," "Lost" and "Grey's Anatomy" on ABC's Web site. The online versions of these programs include commercials that cannot be skipped.

Iger would not disclose details about how many people have watched shows online so far but he said that the company was pleased with the traffic and that advertisers were very interested in the online product.

Disney's embrace of the Internet is one reason why Wall Street is excited about the stock. Investors feel that Disney is adapting to the changing landscape of the media business in order to keep up with online search giants like Google. (Research) Soleil's Martin said that the addition of Apple CEO Steve Jobs to Disney's board as a result of the Pixar deal (Jobs was also chairman and CEO of Pixar) is a good thing for Disney since it could help the company become even more competitive in the digital arena.

However, online revenue is still just a small part of Disney's overall story. Staggs said that the company expected to generate about $500 million in online sales related to content and that if you add in revenue generated by online reservations for the company's theme park business, Disney would have more than $1 billion in Internet revenue. To put that into context, Disney is expected to generate $34.2 billion in total sales during this fiscal year, which ends in September.

Discussing the company's network TV business in more detail, Iger said that Disney was confident about the company's lineup of shows for the new TV season, which begins next fall.

Disney will unveil its 2006-2007 lineup to media buyers next week during the so-called upfront period and Iger said that the company is in a good position to negotiate rate increases with advertisers. "ABC does expect to grow revenue nicely during this upfront," he said. He added that the company also expected to see healthy demand for advertising at cable networks such as ESPN and the Disney Channel.

Looking ahead, Staggs reaffirmed Wall Street's growth targets for the company. He said that even after factoring in earnings dilution from the Pixar acquisition, Disney expects to report its fourth consecutive year of double-digit profit growth this year. Analysts currently are predicting that Disney will report earnings per share of $1.46 for this fiscal year, a 10 percent increase from a year ago.

Robin Diedrich, an analyst with Edward Jones, said that Disney clearly has momentum on its side and that with ABC expected to continue posting strong ratings, the company's stock probably will keep outperforming its competitors in media for the foreseeable future.

"Investors should be pleased with these results. Disney seems to be the best positioned media company for the next year or two," she said. "Everyone has growing confidence in Bob Iger."

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For more about the outlook for Disney and other big media companies, click here.

For a look at how other theme park operators are dealing with high gas prices, click here.

Analysts quoted in this story do not own shares of Disney and their firms have no investment banking relationships with the company.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan. Top of page

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