Disney: Turn That Frown Upside Down

Last night, Shares of Walt Disney (DIS) were trading down more than 2% after the house built by Mickey Mouse reported its fourth-quarter results. Today they’re up more than 2%. What gives?

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On the surface, Disney’s earnings were not so bad. One might even call them good. Disney reported a profit of 77 cents, beating estimates for 76 cents, on sales of $11.6 billion, ahead of analyst estimates for $11.4 billion. But investors honed in on the operating profit at Disney’s television networks, which came in at $1.28 billion, worse than what some analysts had expected.

The network results, however, might not have been as bad as they first seem. Wunderlich’s Matthew Harrigan explains:

Cable network operating income fell 7% to $1,284mm in FQ4 simply as a result of the $172mm reduction in recognition of previously deferred ESPN fees for programming delivery commitments.Sans this effect, operating income would have increased by $77mm or nearly 6%. CFO Jay Rasulo suggested on the CC that normalized ESPN and Disney Channel profitability for the core networks was up high single and low double digits for the period. Another distortion was from Lifetime’s investment in a new German free to air channel.

And in a move that seems straight out of the Passover Haggadah, where rabbis manage to turn 10 plagues into 250, Citigroup’s Jason Bazinet ups the ante:

…we think the gap can be explained by three drivers:1) $172 million reduction in deferred affiliate fees, 2) $14 million y-o-y decline in income of investees from A&E, 3) Approximately $25 million investment in launch of German free-to-air channel. Absent these three factors, Cable Network EBIT would have grown about 9%. And, none of these three items – ESPN deferral, A&E decline or FTA launch costs – is recurring. As such, we think the Cable Network EBIT miss is not indicative of future EBIT growth for ESPN or the broader Cable Networks segment.

While the top-line and EPS beat expectations, results at Cable Network missed expectations. We aren't worried by the miss. It's apt to prove transitory. But, if Mr. Market sells first – and asks questions later – we'd be buyers into that weakness.

Investors appear to agree. Shares of Disney have gained 2.1% to $68.54 at 2:02 p.m., joining a strong-performing group of stocks today. CBS Corp (CBS) has advanced 2.3% to$58.20, Twenty-First Century Fox (FOXA) has risen 2.9% to $33.75 and Comcast (CMCSA) is up 1.7% at $48.06.