Disney (NYSE:DIS) reported strong Q3 fiscal 2012 earnings, driven by growth across several businesses including its media networks, filmed entertainment, parks & resorts as well as consumer products. This is more or less in-line with our previous expectations (see Disney’s Earnings Should See Broadbased Growth Across Businesses). Below we give a quick snapshot of Disney’s results and what really matters.
ESPN’s Operating Income Down, Full Year Expectation Unaffected
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Approximately 45% of Disney’s value can be attributed to ESPN and related channels. ESPN charges a subscription fee (per subscriber per month) which is highest in the industry. This fee has increased from about $3.26 in 2007 to about $4.69 in 2011. This year has seen a further increase in this fee and it appears that ESPN is now charging somewhere around $5.15 per subscriber per month.  Despite this fee increase, the company’s operating income declined this quarter compared to same quarter previous year. However, this is a temporary issue due to timing of revenue recognition and full year expectations remain unchanged.
ESPN is still dominating when it comes to sports and along with subscription fee increase, the ad pricing for the channel is also experiencing healthy growth. In Q3 fiscal 2012, ESPN’s ad revenue grew by roughly 15% (mid-teens) driven by high ratings as well as improved pricing.  The ad inventory was efficiently utilized as well, driving up the unit sales.
Disney Channel Gave A Boost
Disney Channel is another flagship channel for Disney, besides ESPN. It recently surpassed Viacom’s (NASDAQ:VIA) Nickelodeon to become the top-rated channel on cable. As expected, the performance is paying off and Disney stated that the channel was the prime driver of cable networks revenue growth due to contractual increase in subscription fee.  Nevertheless when seen in context of the whole company and compared to ESPN, Disney Channel is still a small value contributor.
Significant Improvement In Film Business
As expected, Disney’s filmed entertainment business did very well compared to the previous quarter. Compared to Q3 of fiscal 2011, it was more or less flat despite success of blockbuster Avengers. Nevertheless the profits were significantly higher. The essence is that even though revenues were roughly flat year-over-year, profits increased because costs were limited to fewer movies. Avengers single-handedly drove a significant proportion of the profits. We estimate that movie business constitutes close to 10% to Disney’s value.
Avengers has developed into an important franchise for Disney and the company’s several other businesses such as cable networks, broadcasting, consumer products etc. are working to leverage this franchise to boost their own sales. Therefore, the true value of such franchises is not limited to box office or DVD sales.
Disney is planning to leverage marvel’s characters and animation unit’s efforts to bring more potentially successful movies over the course of next few years. The company is launching classics Finding Nemo and Monsters Incorporated in 3D towards end of this year. Furthermore, sequel of Avengers and some other movies based on characters such as Iron Man, Thor and Captain America are lined up for next couple of years. This suggests that Disney could continue to perform well in movie business.
Parks & Resorts Did Well
Disney’s parks & resorts business, which constitutes a little over 10% to Disney’s value, demonstrated continued demand despite slow economic recovery. The attendance and average guest spending increased and launch of Disney’s new cruise was a success.  The company is making several investments in this area and 2012 is likely to see high capital expenditures, thus suppressing cash flows from this business. Over time, these investments will pay off and capital spending will come down (as % of revenues).
We are in process of updating our pricing model for Disney in light of recent earnings and will have an update ready soon.
Our current price estimate for Disney stands at $51.50, implying a premium of less than 5% to the market price.Notes: