Disney's ( ) third-quarter 2009 report looked a lot like its second-quarter 2009 report. Trends remain weak but are not getting any worse. EPS beat by a penny while revenue fell slightly short of expectations. The revenue miss led to CNBC headlines and a post-report sell-off in the shares, but the miss appears to emanate from the impossible-to-model studio entertainment segment and greater-than-expected revenue deferrals at ESPN that will be recovered in the next two quarters.
Advertising at ESPN was down close to 10%, a little worse than expected and lagging the figures posted by Time Warner ( ) and Viacom ( ) . But this was not unexpected given ESPN's greater exposure to auto advertising. A mid-single-digit decline at ABC and an upper 20% decline for the local TV stations were as expected and almost identical to advertising trends in the March quarter.
Theme parks offered a mixed picture. Good cost controls and promotions that drove attendance and helped cover high fixed costs allowed margin performance to improve sequentially. Bookings, however, weakened slightly with the December quarter looking down 7%.
Overall, Disney's results are similar to those reported by Viacom and Time Warner earlier this week. Business trends are stabilizing but not improving and visibility remains low.
All three stocks have rallied sharply with the market and the rest of the media stocks. Like its two peers, I expect Disney shares will sell-off slightly in response to its earnings report. The problem is not with the quarter, which has no major issue. The problem is the stock's rally reflects more than stabilization of weak trends. More signs of improvement are needed to drive the shares higher.
Unlike some others I am not willing to pay a big premium for Disney compared to the other big entertainment conglomerates. The company has unique assets and is well-managed, but the gap is closing as other companies, particularly Time Warner, improve their asset mix and operations. In addition, Disney remains more cyclical than its peers while business trends are doing nothing more than bumping along the bottom.
As with Viacom and Time Warner, I have no argument if you want to own Disney to play an improved economic outlook and operating leverage from cost-cutting. For now, though, the easy money has been made.
