Staying Bullish on Walt Disney

The pluses beat the negatives for this stock.
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Editor's note: This column by Steve Birenberg is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on Nov. 13 at 9:10 a.m. To sign up for Street Insight, where you can read Birenberg's commentary in real time, please click here.

Walt Disney's

(DIS) - Get Report

fourth-quarter 2006 earnings report left room for debate on whether the company's four-year string of double-digit operating income growth is about to come to an end.

With DIS shares at a premium to other diversified media conglomerates -- a premium earned by the company's outstanding performance the last few years -- the FY07 growth rate is critical to the performance of DIS shares in the month-end.

I have been a Disney fan, partially on the belief that skepticism toward the 2007 growth rate would give way to the realization that DIS would continue to drive industry-leading growth. What follows is a rundown of the pluses and minuses at the margin for DIS in 2007. I still believe the pluses win out, but you can decide for yourself.

Positive Swing Factors

  • ABC is off to a great start this TV season. The shift of "Grey's Anatomy" to Thursday night, popular new shows, spot advertising rates above upfront advertising rates agreed to six months ago, and the elimination of losses on "Monday Night Football," or MNF, all suggest upside to ABC, which has significant operating leverage.
  • ESPN's ratings are very strong this season. MNF's ratings are above guarantees, likely providing upside in profitability (or reduced losses) on this expensive rights contract. Losses on the ESPN Mobile venture won't be repeated.
  • DVD sales for Pirates of the Caribbean, Cars and a slate of other successful films that were released in FY06 will hit in FY07, mostly in the current quarter. This is very high-margin revenue.
  • The divested Disney Stores will begin to receive licensing fees.
  • Merchandising revenue, again a very high-margin stream, will continue to be boosted by Cars and Pirates.
  • Domestic theme-park attendance has held up well, with flat comparisons against very tough comparisons. Revenue is still climbing as per-capita spending is rising by mid-single digits.
  • Margin expansion will continue at domestic parks, helped along greatly by a sharp drop in pension costs. Admittedly this is a low-quality earnings stream.
  • Euro Disney and Hong Kong Disneyland will see reduced losses.
  • A smaller film slate means incrementally lower marketing costs.Cost-cutting at the movie studio could save $100 million.

Negative Swing Factors

  • DIS continues to invest in its video-games unit. Incremental spending will be $30 million.
  • Radio will ultimately be divested. Investors will probably look at pro forma growth, but this division is worth -5 cents in annual EPS.
  • Capital spending is going up due to theme-park investment and further spending on digital-content initiatives.
  • Losses may be higher for the Disney-branded mobile-phone initiative.
  • ESPN won Nascar rights, which will begin to be amortized in calendar 2007.
  • Consumer products had minimum guaranteed revenue related to its sale that disappears in 2007.
  • The tax rate is going up slightly.
  • The Pixar acquisition will be dilutive for a full year.

In my opinion, analyst estimates somewhat favor the negative factors, leaving room for upside if the positive factors come through. Additionally, DIS appears very close to renewing its deal with

Comcast

(CMCSA) - Get Report

for carrying the

ESPN

family of cable networks and the Disney Channel.

The deal is rumored to include the sale of Disney's minority stake in

E!

for over $1 billion. The sale of the

E!

channel, the divestiture of radio, the acquisition of Pixar, and the investment in video games and digital content, as well as the continued investment in international parks and distribution, signal how DIS hopes to drive growth beyond 2007.

Besides what I hope will be rising estimates in 2007, I believe DIS has laid out the clearest path to long-term growth with the simplest capital structure among the major entertainment conglomerates. Put those two things together and it should be obvious why I remain bullish on DIS shares.

At time of publication, Birenberg was long DIS and selected positions in CMCSA and CMCSK, 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. Prior to forming Northlake, Birenberg was a principal, director of research and portfolio manager at Gofen and Glossberg, LLC. Prior to that, he was a trust investment officer at Star Bank in Cincinnati, Ohio. Birenberg has managed portfolios and researched stocks for more than 22 years. He earned his bachelor's degree from Miami University, Ohio. From 1987 through 1992, Steve taught at the CFA preparatory program the Study Seminar for Financial Analysts in Windsor, Ontario. Birenberg appreciates your feedback and invites you to send it to

steve.birenberg@thestreet.com.