Disney 3Q07 Earnings Preview

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Disney (DIS) faces a tough comparison when it reports its 3Q07. Projected EPS of 55 cents are up just 4% vs. a year ago. Analysts have long expected this to be the toughest comparison so it should not come as a surprise. Given ongoing concerns that DIS’ best financial performance is behind it, the report and conference call could be significant to resolving the debate.
DIS has been growing at a double digit rate for several years and the stock price has responded accordingly. Financial performance in all divisions has been excellent and current profitability levels are at all-time highs pretty much across the board. No one argues that DIS’ growth will not slow. Rather it is the magnitude of slowing where the debate occurs. I am in the bull camp, believing that double digit growth can continue. The stock is acting like the growth string is near the end. A good report with confident talk about the future – DIS does not provide guidance – should be greeted well but any shortfall or signs that the rest of 2007 will remain sluggish probably means the end of the bull run in DIS shares for the time being.
For 3Q07, DIS is expected to report EPS of 55 cents on revenues of $9.04 billion. Revenue growth is projected at 6%. Operating income is the key metric for DIS and it is projected to grow at or slightly ahead of revenues indicating flat to slightly higher margins.
As with most of the major media stocks, it is segment level results where the action takes place. Here is a brief preview of each segment…

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Good Quarter, Bad Reaction For Rogers Communications

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Rogers Communications (RCI) reported 2Q07 earnings on July 31st. The results were at the upper end of expectations and management raised the high end of the guidance range for many key metrics. Nevertheless, the shares traded off as much as 4% initially, cut the loss in half as the conference call was occurring, and closed down 5% succumbing to the last hour sell-off in the market..
I think the negative reaction to a solid earnings report occurred for five reasons. First, expectations were too high given that Rogers’ shares had risen over 30% since the last quarterly report due to heightened takeover activity in Canadian telecom and recognition of the growth and profitability of the company’s #1 position in Canadian wireless telephony. Second, this quarter was not the blowout positive surprise that the company had usually provided over the past six quarters. Again, the expectations game worked against the shares. Third, the guidance increases were widely expected and the new ranges did not exceed current analyst estimates. Fourth, margins at Rogers Cable retreated for the second consecutive quarter. Finally, the company was quiet on further uses of the growing free cash flow to enhance shareholder value. Additional dividend increases, tuck-in acquisitions, and capital spending to “bullet proof” the company’s network and customer service infrastructure for the cable and wireless businesses were mentioned. Major acquisitions and share repurchases were ruled out. I believe that some investors were looking for a more aggressive stance including a major share buyback.
Despite the reaction of the shares, I came away from the quarter more positive on Rogers. Plugging fresh numbers at the high end of the upwardly revised guidance raises my target for the shares to $54. Two major factors are at work. Wireless is booming and free cash flow in 2008 looks even better than I had thought….

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The Simpsons Drive Huge Gain at the Box Office

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A bull market existed at one place over the weekend: the nation’s movie theatres. Thanks to a huge opening for The Simpsons Movie and good holds for all the other top movies, the weekend box office rose 45% vs. the same weekend a year ago. Since June 29th, when the second quarter started for the theatre companies, the box office is up 14.8%. This figure is well above upper single digit gains built into analyst models.


Th box office comparison should remain favorable but with a more modest gain this weekend with the opening of The Bourne Ultimatum and solid performances from holdovers. In 2006, this coming weekend was the last decent weekend for the summer when Talladega Nights opened to $47 million. The rest of this summer faces easy comparisons with a couple of more films to be released that are expected to do solid business.


The box office is on track to comfortably exceed the all-time summer record set in 2004. According to data compiled from BoxOfficeMojo.com by David Poland of TheHotBlog.com, the box office is presently running $220 million, or 6-7% ahead of 2004. Year-to-date, the box office is now up 5.9%, the second consecutive year of strong growth following last year’s gain of 4%. This year is also on track for the second consecutive gain in tickets sold following a three year slump. This data should put to bed the “going to the movies is dying” theme.


Movie-going is not a great growth a business but it is a stable business that produces significant free cash flow for the theatre companies. Regal Entertainment (RGC), widely owned by Northlake clients, represents a great way to play the summer box office momentum and the overly negative sentiment on the industry. Regal is also attractive in the currently unstable stock market environment as it has a 5.6% current yield. Regal was up 10 cents on Friday and fell just 7 cents, less than one-third of one percent, combined on Thursday and Friday.

Earnings Looking Good So Far

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Between Wednesday’s market close and Thursday’s market open, four stocks held widely by Northlake clients reported earnings and held conference calls. Apple (APPL) did quite well, NII Holdings (NIHD) was solid, Regal Entertainment (RGC) was as expected, and Comcast (CMCSA/CMCSK) was a little below my expectations. Overall, I am quite satisfied with the start of earnings season as far as Northlake stocks are concerned. Here is a brief recap of each report:
Apple reported another great quarter. Following a day or two of controversy over the first weekend sales of iPhones, Apple reminded us that business momentum in Macs and iPods remains excellent. Earnings of 92 cents crushed analyst estimates of 73 cents. Revenues were a little better than expected as Mac sales came in at 1.7 million units vs. estimates of 1.6 million and iPod shipments of 9.8 million were at the high end of estimates. The big story, however, was margins which again expanded sharply as Apple’s brand strength is allowing it to maintain prices as commodity costs for memory collapse. Looking ahead, management is assuming that commodity costs increase and new products have lower price points, so guidance calls for EPS of just 65 cents in the September quarter. I expect that to be too low but memory prices have definitely increased. Management also did a good job on the call of reigning in overly bullish iPhone estimates. Overall, Apple proved that its operating momentum remains intact and that future earnings power maybe above street estimates. I see another 15-20% upside in the stock on the basis of new product introductions that will drive December quarter earnings.
NIHD reported better than expected subscriber growth, in line revenues and EBITDA, and a few penny shortfall in EPS. The stock fell sharply on Thursday but I think that was due to the market not the earnings report. Looking ahead, management raised 2007 guidance for revenue, EBITDA, and subscriber growth. More importantly, NIHD announced new investments to expand the networks in Brazil and Chile. Brazil has been performing great the last few quarters and is a very large market. Chile is a brand new market with significant potential and a profile that looks favorable for NIHD’s push-to-talk Nextel cellular service. The timing of the new investments is good as NIHD has completed the expansion of its network in Mexico, its largest market, and will begin to reap the financial benefits as subscriber growth accelerates with launch expenses winding down. Brazil and Chile should insure an another leg of growth that will extend the outlook for at least 25-30% growth annually out to 2011. NIHD is a true growth stock with substantial upside as long as Latin American stock markets do not collapse.
Regal Entertainment’s results closely tracked the 1% increase in the box office for the second quarter. Initial estimates of 2Q box office called for an upper single digit gain which left me worried that the earnings report would disappoint investors. However, the stock has held in well even as the market had dropped indicating that the pullback in the shares earlier this month compensated for weaker than expected box office. July is off to a fantastic start with box office up 11% and a strong film slate against easy comparison for the rest of the summer. I’d like to take profits in RGC shares for clients that don’t need high income if the renewed box office momentum pulls the stock back to new highs. I think that will happen.
Comcast reported mixed results that were greeted poorly by investors. The fact that they reported mixed results on such a bad day in the market led the shares to perform worse than reality. Revenues and operating cash flow grew 12% and 13%, respectively, just short but very close to estimates. Digital TV and VOIP telephony subscribers comfortably exceeded estimates while basic cable TV and high speed internet subscribers fell short. During 2Q, Comcast made a huge effort to ship digital TV set top boxes ahead of new regulations on July 1st that requires new box technology. This effort hurt the execution in other products and held back the results. I am very confident that operating trends will accelerate in the second half of the year. The acceleration should allay investor concerns about competition from Verizon and AT&T and lead the stock to much higher levels.

Summer Box Office Update #2

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As I expected, the summer box office momentum resumed at the end of June. Since June 29th, the box office is up 11%, ahead of analyst estimates built into 3Q models for the theatres companies. I think the rest of July and August should be able to sustain the gains with some possibility for further gains as the release schedule looks good and early reviews and buzz on upcoming films is favorable.
The renewed momentum should allow theatre stocks to move back to their early summer highs over the next six weeks. Regal Entertainment (RGC), held widely across the Northlake client base should be a primary beneficiary
Coming into the summer, analysts were looking for an upper single digit gain for the season which runs from the first weekend in May through Labor Day. Box office gurus also were expecting the summer to beat the all-time record from 2004 of $3.8 billion. Most of the excitement surrounded the big three May blockbusters, Spiderman 3, Shrek The Third, and Pirates of the Caribbean: At World’s End. While none of these films missed analyst estimates, the strength mostly occurred overseas. The combined domestic gross of the films is almost $960 million but I think many prognosticators felt that $1.1 billion was realistic. Two other early June releases also fell short of expectations. Evan Almighty will miss by about $70 million and Oceans 13 will miss by about 45 million
The shortfall of $265 million for these five films soured sentiment on the theatre stocks and cost the box office about 7% versus the record summer of 2004. As a box office and theatre stock bull, I was disappointed but I didn’t get too shook up because I was aware that this was going to be a backend loaded summer.
I had completed an analysis which revealed that last summer there were only two films released in July or August that grossed over $100 million — Pirates of the Caribbean: Dead Man’s Chest reached $423 million and Talladega Nights brought in $148 million. However, for 2007, the gurus expected as many as nine films released from the last weekend in June onward to gross over $100 million and two of those films, Transformers and Harry Potter and the Order of the Phoenix, had the potential to bring in $200 million to $300 million. Fortunately for box office bulls, the recent releases have done very well and as I mentioned buzz is good for the yet to be released films….

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Apple 3Q07 Earnings Preview

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My friend and Real Money colleague, Bob Faulkner, is handling the Apple conference call for the website this quarter. Bob specializes in technology so his input is especially interesting. I’ll be listening to the call as well.
In the “Continue Reading” section I have reporduced Bob’s preview. I generally agree with him across the board. Beyond what Bob has mentioned, key things to watch are Mac and iPod unit sales and ASPs and comments surrounding margins and memory pricing. Estimates for Mac sales are around 1.6 million units while iPod estimates have been drifting lower to 9.0 to 9.5 million. On margins, expect cautious commentary toward 4Q due to the recent increases in memory pricing. I think this area represents the greatest risk to Apple shares in the near-term.
Here is Bob’s preview….

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Another Good Quarter for AT&T

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While there were a couple of issues with AT&T’s 2Q07 earnings report, overall I think the results were good with underlying trends supporting the investment thesis that has led the shares to gain by 33% since last fall. I think further gains lie ahead.
AT&T reported EPS of 70 cents, up 21% vs. a year ago, on revenue growth of 2%. Both figures were slightly above expectations. Revenue growth continued to improve as the mix shifts toward wireless and data across all businesses. Cost synergies continue to be at the high end of expectations, pushing margins to the top end of management guidance….

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Comcast Bidding for Virgin Media?

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Big headline is something called City A.M. in the UK claims an inside source says that Comcast is considering a bid for Virgin Media. While Comcast may have requested info from the bankers running the auction I’ll be shocked if they bid. I think the Comcast-Virgin Media rumors are being planted by the Virgin Media side to boost the pressure on private equity to bid higher. Comcast has a great groove going and won’t mess it up by buying into the hyper-competitive, low growth UK market where cable is not leader as it is in the US. The same article mentions Time Warner as a potential bidder, another rumor I don’t believe. Weakness in Comcast or Time Warner on this news should be bought.

Summer Box Office Growth Still On Track

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The third quarter improvement in the summer box office continued over the weekend but at a slower pace. Led by the new Adam Sandler film, I Now Pronounce You Chuck and Larry, the box office for the top 12 films was up 3.5% according to data from BoxOfficeMojo.com. Harry Potter and the Order of the Phoenix came in second followed by the opening weekend for Hairspray. I had hoped for a few million more from the Potter film and Hairspray and a gain in the range of 6-8%. However, things are still shaping up well for this quarter with next weekend looking particularly good when The Simpsons Movie is expected to open to a big number. Some observers are looking for a monster opening in the $40-50 million range for The Simpsons Movie, while last year the #1 movie on the same weekend was Miami Vice which brought in just $25.7 million.


Since June 29th, which will be the start of the third quarter for the theatre exhibitors, the box office is up 11%. Theatre exhibitors begin to report earnings this week with my favorite, Regal Entertainment (RGC), announcing before the open on Thursday. I believe the strength so far this quarter will offset the fact that earnings will almost certainly fall short of estimates in 2Q due to the fact that the box office gained just 2.5% against analyst models that were built an upper single digit gain. Furthermore, the recent rally in interest rates, with the 10-year falling below 5%, makes RGC’s current yield of 5.5% a lot more attractive and leaves the shares with good downside protection.

Financial Times Writes Up Central European Media Enterprises

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The Financial Times posted an interesting article on CETV and its role in consolidation of European TV stations. The article touched on CETV as a seller and buyer and included some surprisingly frank comments by Wallace Macmillan, the company’s CFO.
As a reminder, last year private equity firm Apax Partners bought control of half off Ronald Lauder’s controlling stake in CETV. Apax could easily drive CETV to be either a buyer or seller but in the first three years if CETV were a seller Apax has the right to reject anything short of $120. There are a little over two years left.
I think CETV shares can double again in the next few years based on growth in cash flow assuming the stock market cooperates. I also think a buyout in the near-term would probably be in the $140 range.
As for CETV buying more assets in the region including Poland and Russia, at the right price I’d be happy with most deals.
Click on the “Continue Reading” link below for the full FT article. It is beyond the jump due to copyright issues….

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