Web 3.0 & Walt Disney (Part 5)

Conclusion

Walt Disney Co., the second-largest U.S. entertainment company, reported on Thursday a 12% rise in quarterly profit, driven by sports network ESPN, more visitors at theme parks, and increased sales of consumer products but revenue just missed Wall Street’s target. Disney reported net income of $877 million, or 44 cents per share, for the quarter ended Sept. 29, compared with $782 million, or 36 cents per share, for the year-ago period.

Revenue grew 3% to $8.93 billion from $8.65 billion in the same period last year. Excluding a 2-cent-per-share tax-related benefit, Disney earnings were 42 cents per share, in line with Wall Street’s average target. Analysts, on average, had forecast revenue of $9.02 billion, according to Reuters Estimates.

For the full fiscal year, Disney reported net income of $4.69 billion, or $2.25 per share, compared with $3.37 billion, or $1.64 per share, for fiscal 2006. Revenue increased to $35.51 billion from $33.75 billion. Analysts had been looking for annual net income of $1.92 per share on revenue of $35.63 billion.

Chief Executive Bob Iger said he had not seen any signs that economic weakness was weighing on advertising or travel, but a Hollywood writers strike that began this week could cut into network profits if it lasted more than four weeks.

Disney has posted double-digit operating growth for six quarters, and is well poised for another year of solid growth, despite a softer consumer environment. Goldman Sachs analyst Anthony Noto said “We believe the shares have the potential to appreciate even in a decelerating economic environment … with drivers of growth coming from content-driven success.”

Disney said it plans to boost capital expenditures by $250 million to $300 million in fiscal 2008, with the new money going mostly to digital improvements at its studio and networks. I feel the focus on the digital improvements is crucial for Disney’s online success and future growth. The Company was slow to start its digital initiatives, but seems to be catching up.

The Company has already announced in mid July that it is planning to launch a social networking site for kids called DGamer in May 2008. DGamer will allow kids to chat, trade items, and build online achievements using in-game avatars. Disney claims that anything done on DGamer via the Nintendo DS will also be done online through a designated portal at Disney.com and vice versa, for what they call “complete synchronization.”

This is definitely a good move, though a bit late in the day but with the Disney’s strong brand loyalty and the Company’s capability to dish out high quality content and experience, this should be an interesting property. Disney is banking on the rising popularity of its DS community (40 millon+) and various other kid-themed social networks. The site will leverage Disney’s other kids properties to build traffic.

The stock is trading at a multiple of 15.6 times estimated 2008 earnings, compared with 15.7 for Time Warner and 15.6 for Viacom, according to Reuters Estimates. But with the rapid developments being made by the Company in the digital space, the integration of the various media platforms, strategic acquisitions of Club Penguin & Pixar, launch of DGamer in mid 2008, possible other acquisitions and a modest outlook from the management, the stock can go up to $40 in the next nine months from its current $32-33 level.

Even with a softer economy, the enormous rise in online advertising dollars is going to continue. Disney simply needs to spend judiciously to acquire the right properties to enhance its portfolio, and tap into this growth market more aggressively. We have discussed several good targets in this series that could do the job.

[Part 1] [Part 2] [Part 3] [Part 4]

This segment is part 5 in the series : Web 3.0 & Walt Disney
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