Media Stocks: Disney, Time Warner

The Walt Disney Company (DIS) had been exceeding market expectations over the past few quarters. However, the recently announced quarterly results showed that Disney is one more company that is not immune to the recession and decline in consumer confidence.

Though Disney managed to beat revenue estimates of $9.3 billion by recording quarterly revenues of $9.4 billion, they slipped on the EPS expectations. EPS of $0.43 was significantly lower than the Street’s expectations of $0.49. Revenue for the quarter recorded an annual growth of 6% and a sequential growth of 2%, while EPS grew by 2% over the year.

The company also had a bad debt charge of $91 million in the quarter on account of Lehman Brothers’ liquidation.

By segment, media revenue grew by 4% to $4.2 billion. Parks and resorts revenue grew by 7% to $3.0 billion while studio revenue fell by 5% to $1.5 billion.

The weakness in advertising sales at ESPN and ABC during the previous quarter continued this quarter. Advertisement sales slowed down not only at the local level, but also at the national level. This is despite benefits of political spending in the recent quarter. Problems in the domestic automotive manufacturers, electronics and financial sectors have led to declining sales. Big 3 automakers going into bankruptcy will not help in the upcoming quarters.

Attendance at Disney theme parks was down by 1% over the previous year. The company continues to come up with innovative pricing mechanisms to attract crowds to the parks. They recently announced schemes such as the 4/3 package, which allows visitors to stay seven nights for the price of four at a Disney hotel in Walt Disney World, Florida.

Their high quality branded content continued to produce good results with the success of the High School Musical and Fairies franchises. Disney is expanding their franchise offerings from Cars to Princesses and from Pirates to Toy Story, Mickey Mouse, Winnie the Pooh, Hannah Montana, and The Jonas Brothers.

Disney announced plans to invest in two new cruise ships and continue to be on the lookout for a potential acquisition for their video games section. Such as acquisition will help them strengthen their position in the family entertainment and the children segments as games continue to be a growth sector.

The stock did take a battering and reached a new five-year low of $19.58 earlier this week. It has recovered marginally and is trading at $20.67, with a market cap of $37.61 billion. The outlook for Disney will continue to hurt from the car industry’s woes.

Time Warner’s (TWX) restructuring exercise seems to be yielding results. The recession, however, is a dampener to their performance.

Revenue for the quarter remained flat at $11.7 billion, slipping on the market’s expectations of $11.9 billion. EPS for the quarter was $0.31, up 29% over the year and sequentially to beat the market’s expectations of $0.27.

Their cable division will be finally separated by early next year and they will then become a pure content player. AOL continues to be their Achilles’ heel with revenues falling by 17% over the year. Though the company is still not talking about a spin-off of AOL, the market is abuzz with speculation of Yahoo! wanting to acquire it.

Like the other players, advertising continued to decline over the quarter. AOL’s advertising sales were down 6% while the overall ad revenue grew by a modest 1%. Subscription revenues increased 9% driven by an 8% annualized increase in RGUs. ARPU per basic subscriber also registered a modest increase of $6 to reach $109 during the quarter.

Their market penetration continued to improve. During the quarter, they added 13,000 net customers and ended the quarter with 7.8 million customers with residential high-speed-data penetration of over 31% and digital phone penetration of over 20%.

In view of the recession which has affected the growth of their subscriptions and revenues from their non-political advertising sales, Time Warner revised down revenue growth outlook to 8%. Add to that the impact of Hurricane Ike on their earnings, and they are expecting OIBDA also to grow by 8% for the year.

Meanwhile, they continued innovative pricing and bundling strategies such as waiving fees for HD programming, adding additional features to standard subscribers and making it easier for the over-the-air households to continue to receive their local channels after the DTV transition.

They also added focus to commercial services by giving SMEs a new choice in phone services and by introducing a business class Ethernet option. They recorded a net addition of 7,000 customers in this segment.

The stock meanwhile slipped to a new five-year low of $8.01 this week and is currently trading at $8.40 with a market cap of $30.53 billion. The same problem that troubles Disney, also troubles Time Warner’s outlook.

This segment is a part in the series : Media Stocks