Pirates Booty for Disney

DVD sales of the hit movie sequel helped propel fourth quarter profits for the Mouse House, but comparisons may get tougher in '07

Thanks to strong DVD sales of hits Pirates of the Caribbean: Dead Man's Chest and Cars and some asset sales, Walt Disney (DIS) scored big in its most recent quarter. However, the entertainment giant's outsized growth may be harder to come by in the coming quarters when stacked up against 2006's strong results.

The Burbank, Calif.-based company said after the close of trading Feb. 7 that net income in its fiscal first-quarter ended Dec. 31 more than doubled to $1.7 billion, on a 10% rise in revenue to $9.725 billion.

Disney said net income in the quarter was boosted by $1.1 billion from the sale of interests in the E! Entertainment channel and Us Weekly magazine. Excluding that gain and other one-time items, Disney's earnings per share jumped 43% to 50 cents from 35 cents a year ago, handily beating Wall Street's forecast of 39 cents.

"I am very pleased to report such strong quarterly earnings to kick off 2007," said Bob Iger, Disney's president and CEO, in a press release. "These results are particularly gratifying given the great year we had in 2006 and are another clear sign our strategy is driving growth and creating shareholder value."

Shares of Disney rose to a 52-week high of $36.09 during early trading Feb. 8, but then fizzled and traded flat at around $35.48. The stock is up 35% from its 52-week low of $26.25, hit almost a year ago.

A few analysts cheered the results. "We saw stellar results on Pirates 2 and Cars DVD sales, ABC and Disney Channels, with modest ESPN gains on revenue deferrals expected to aid the second half," said Standard & Poor's Equity Research analyst Tuna Amobi in a note. He added that he sees strong trends at the company's worldwide theme parks.

Amobi noted that Disney affirmed its 40% digital revenue growth target to $700 million for fiscal year 2007 (ending September). "Consistent with Disney's view, we see double-digit earnings growth through at least fiscal year 2008," he said. Amobi raised his target price by $5 to $45, and kept a strong buy on the stock. (Like BusinessWeek.com, Standard & Poor's is owned by the McGraw-Hill Companies.)

However, one analyst thinks the company faces tougher comparisons to last year, which might take some spark away from the stock. "Although we continue to believe Disney's fiscal year 2007 EPS estimate has a slight upward bias to it, visibility on that upside will likely get tougher as the year progresses," wrote Prudential Equity Group analyst Katherine Styponias in a note. "As a result, the stock could tread water in the near-term."

In particular, Styponias noted that DVD sales of Pirates of the Caribbean: Dead Man's Chest and Cars accounted for 50 million of the 128 million total sold in the latest quarter. But Disney executives say they face tough comparisons in the March quarter because of DVD sales of The Chronicles of Narnia: The Lion, the Witch and the Wardrobe in the year-ago quarter.

UBS analyst Aryeh Bourkoff also doesn't expect a repeat performance for Disney's studio division in its current quarter. "However, Disney does have a strong theatrical pipeline for the second half of the year with Ratatouille and Pirates 3," wrote Bourkoff, who has a neutral opinion on the stock, in a note.

For fiscal 2007, though, Prudential's Styponias says she thinks there's still "upside bias" to earnings estimates because of "continued strength at ESPN and ABC, lower pension costs benefiting the theme park results, strong results in the film division due to the performance of Disney's summer movies as well as a lower cost structure from changes made to its film strategy." She has her firm's highest recommendation of overweight and a $38 price target on Disney shares.

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