Earnings Friday

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November 8, 2006

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Disney will report earnings after the market closes on Thursday. A year ago, the company earned $.23 a share. The average for the 19 analysts that follow the company is $.33 -- a big jump (and their estimates range from $.29 to $.38). Let's hope that high number is reached and exceeded.

There are a number of interesting comments that might come out of this conference call. This is the Q4 report so talking about the upcoming year is certainly likely. What I am listening for is a deal to 1) finally get a long-term cable deal with Time Warner and Comcast (which will hopefully up Disney's cable rates to much higher levels) and 2) the sale of the E! Entertainment channel for about $1.2 billion.

Higher cable rates, especially a premium rate for ESPN, will bode well for future earnings. The market has been waiting to see what kind of a contract Disney will get (after years of negotiation) and this could be the really big news that sends analysts to their models to re-compute their future outlook for the stock.

The sale of E! will give Mr. Iger a platform to discuss debt and buybacks. Disney has already announced the sale of its 50% interest in US Weekly so the company is showing that it is willing to sell assets that are not turning out Disney-like operating margins. Disney, with a debt-to-equity ratio of 38.9%, hardly needs cash. But, with the company's stock finally climbing, stock buybacks are hardly the best use of cash (although the company has said it would buy back shares after the Pixar deal). But, after all the lean non-Wells years, Disney is showing fiscal responsibility without using a budget axe. Mr. Iger may finally convince Wall Street that Disney is worth a higher multiple because he will manage margins and asset quality. [Note: I am really enjoying the post-Eisner years...]

If Mr. Iger is looking to establish himself, he might do that by announcing a long-term goal to get debt-to-equity to 25% or lower. That would indicate the company was looking to build its debt ratings -- a good move if the company wants to make a big acquisition in the future.

Note too that Disney is investing in itself like never before. From a studio for Nintendo games to Disney Mobile, the company is finding exciting ways to build on its name recognition. But, even here, the good news may still be in the wings. I have loved the Pixar acquisition because it brought creative talent to Disney's executive staff. While Cars may get the lion's share of the words, Mr. Iger just might take the covers off (before the annual report) to showcase what these people are bringing to the table. Again, if Mr. Iger can show the old can't-make-it-grow-quickly years are behind Disney, the stock's multiple is in for a boost.

I have heard comments that this earnings report is going to be great. With Pirates sure to bring home the bacon (with a total box-office of $1.06 billion), the only question for many will be how good ABC and the theme parks performed. But, I think the big news will be the movie studio.

Mr. Iger has cut the number of movies in the pipeline although the number of high-cost but potentially big payoff movies (e.g., Pirates 3 and Narnia) has increased. No other studio is trying this. Besides liking that strategy, and thinking the Cars and Little Mermaid DVD sales will highlight that movie revenue is ongoing, there might be bigger profitability here than many expect. If operating margins are up (meaning the high budget movies are not sucking dry what a big production pipeline required) analysts may have the logic to build up future earnings streams for this business.

Sorry for the long post but Disney is, once again, an exciting company to own. I am looking forward to the conference call and Mr. Iger's message to shareholders in the annual report.


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