DIS Preview: We've Seen This Movie Business Before

Disney (DIS - commentary - Trade Now) wraps up September-quarter earnings for media and communications companies when it reports after the close on Thursday. Analyst estimates call for EPS of 40 cents on revenue of $9.26 billion. If estimates are hit, revenue will be down about 2%, operating income will fall 15% to 20%, and EPS will be down 4%.

At the segment level, Media Networks should hold up the best, while Studio Entertainment operating profits will plunge. Media Networks includes ABC and local TV stations, ESPN, the Disney Channel and other cable networks. Growing affiliate fees and a rebound in advertising growth, though still negative, should be the drivers at Media Networks. Studio Entertainment faces challenging comparisons and is coming off generally poorly performing movies at the global box office.

Investors will be looking for insight into several issues on the conference call. ESPN ad sales have been lagging the industry due to high auto exposure. Is the company seeing a recovery in auto that is apparent at other networks? ESPN's ratings have been good, as have sports ratings in general. Is the company able to translate ratings into ad sales?

Disney's Theme Parks remain under pressure as consumers watch their pocketbooks. The company has kept hotel occupancy at surprisingly high levels, but the cost has been very aggressive pricing and depressed profit margins. Has the pricing environment improved, or have promotions eased? How do advance bookings look into the holiday season and spring break 2010?

There are also lots of questions about the movie business. DVD sales remain under pressure, and one could infer from the initially poor DVD sales of DreamWorks Animation's (DWA - commentary - Trade Now) Monsters vs. Aliens that animated titles may finally be succumbing to DVD weakness. In addition, Disney has announced several very senior executive changes at its movie studio. When combined with the Marvel Entertainment (MVL - commentary - Trade Now) acquisition and the deal to distribute movies for Steven Spielberg, Disney seems to taking a new approach to the movie business. The model now seems to be purely distribution, with ownership of larger budget films restricted to Pixar, and possibly the long-term relationship with Jerry Bruckheimer sprouted from the Pirates of the Caribbean franchise. Astute blogger and critic David Poland of The Hot Blog and Movie City News noted that the new Disney model looks an awful lot like the failed Paramount model if Pixar is excluded. I wonder if any analyst will have the guts to ask that question!

---

At time of publication, Birenberg had no positions in the stocks mentioned, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.