Disney Earnings Preview: TV, Film Rebounds Have Analyst Hopeful

Walt Disney Co. (DIS) will report its results for the first quarter of fiscal 2010 after the bell Tuesday, and despite the fact that it reported a decrease in revenues for fiscal 2009, down to $36.15 billion from $37.84 billion in fiscal 2008, anticipation from at least one analyst is positive.JPMorgan analyst Imran Khan appeared hopeful that the first-quarter report would show improvement, and raised his rating of Disney to "neutral" from "underweight," an endorsement, though not a strong one, because he expects Disney will continue to see weakness in its film studios and parks.

Khan based his mildly positive outlook the anticipation of improvements for Disney's cable channels, such as ESPN, which will make up 70% of fiscal 2010 operating income. He forecasts $4.66 billion in operating income for the unit, up $108 million from a previous forecast because he expects advertising to recover. He's also expecting Disney's studio unit to recover. He expects operating income to rise to $517 million from $175 million in fiscal 2009. He does expect income from Disney's theme parks to be down, predicting a 7.4% drop in 2010 operating income from the parks.

The first-quarter results will be especially telling because they include income from the Disney parks during what's usually their best quarter, which includes both Thanksgiving and Christmas holidays. But from what I've heard locally in the Orlando area, where I live, theme park attendance was down for all the Orlando attractions this past holiday season. I've heard similar bad news from people working in area restaurants and hotels as well.

Disney knows its parks have likely reached their growth potential in the U.S., so it is continuing to look for opportunities internationally. In November, Disney announced its plans to build a theme park in Shanghai, China, that could someday rival Disney World in Florida. The park will cost $3.6 billion to build, and Disney will own about 40% of the Shanghai resort. The rest will be owned by a holding company formed by a consortium of Chinese companies selected by the government. This park will set Disney on the right path to meet its goals of generating about 50% of its annual profits from overseas sales. Right now, international sales represent about a quarter of revenue and operating income.

Disney also is looking to buy China's largest in-bus digital media and advertising company. This could become a great platform for Disney to promote both its movies and its future park.

Clearly, Disney sees China as a major market in which to grow. When it reports its earnings Tuesday, look for clues regarding its international plans. Also, take a close look at its revenue numbers from both the parks and film studios and compare them to 2009's figures. Finally, take a close look at income from its cable channels. Growth in that area could be the best news Disney has to offer from the first quarter.
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