Walt Disney Co. (DIS:US) dropped the most in 15 months after reporting fiscal fourth-quarter sales that missed analysts’ estimates amid an ad-sales decline at the ABC network and weakening trends at cable-sports powerhouse ESPN.
The shares slid 6 percent to $47.06 at the close in New York following yesterday’s results. The drop, the greatest since August 2011, reduced Disney’s year-to-date gain to 25 percent. Sales at the world’s largest entertainment company rose 3.4 percent to $10.8 billion, trailing projections of $10.9 billion, the average of estimates compiled by Bloomberg.
Investors were spooked by comments from yesterday’s conference call that advertising trends at ESPN, Disney’s biggest profit driver, were weakening, said Martin Pyykkonen, senior equity analyst at Wedge Partners in Greenwood Village, Colorado. That’s created a cloud of uncertainty, he said.
“Ad sales didn’t really rebound after the Olympics ended,” Pyykkonen said. “ESPN is still an incredibly powerful brand, but maybe it’s kind of peaked.”
ESPN, the leading cable-sports network, is responsible for 75 percent of the operating income generated by Disney’s cable networks, Pyykkonen estimates. Profit at the unit gained 9.4 percent to $1.38 billion in the period ended Sept. 29, Disney said yesterday in a statement. ESPN’s advertising was little changed, while programming costs for sports are rising, company executives said on a conference call. The network faces rising competition from sports channels including NFL Network.
Elswhere, Disney’s film unit (DIS:US) saw declines in revenue and operating income, driven by lower ticket sales and writedowns, while lower ratings at ABC hurt ad sales. Programming and marketing costs at Hulu.com, co-owned with News Corp. and Comcast Corp., led to a 4.5 percent decline in broadcast profit, to $192 million.
The advertising slowdown and Disney’s investments in parks will limit profit growth in the near term, Tony Wible, an analyst with Janney Montgomery Scott in Philadelphia, said in a research note today. He lowered his rating on Disney to neutral from buy.
“A multitude of items will hamper Disney’s fiscal first quarter results such that we lower our near-term estimates,” Anthony DiClemente, an analyst at Barclays, said in a research note. While some of the items are temporary, “some items may be ‘trending,’ such as higher NFL and college football rights costs.”
Net income increased 14 percent to $1.24 billion, or 68 cents a share, in the quarter that ended Sept. 29, Disney said yesterday in a statement. That matched predictions.
Ad sales at ABC fell because of lower summer ratings and the Olympics, while advertising on Disney’s cable channels was “relatively OK,” Chief Executive Officer Robert Iger said in an interview on Bloomberg Television. While ESPN benefits from long-term programing contracts with sports leagues, rival TV networks have bid up the prices, Iger said.
“The competition has probably been a little more heated than we have seen in the last couple of years,” he said.
Disney joins companies including Time Warner Inc. (TWX:US) in reporting disappointing advertising for last quarter, said Paul Sweeney, an analyst with Bloomberg Industries.
“Revenue came in light due to weaker-than-expected advertising revenue on both broadcast and cable-TV networks,” Sweeney said.
Disney agreed to buy “Star Wars” owner Lucasfilm Ltd. for $4.05 billion on Oct. 30, a deal that furthers Iger’s pursuit of marquee content in an era marked by technology changes.
Services such as $8-a-month video streaming and free game downloads have disrupted Hollywood’s traditional revenue sources. Iger, who paid a combined $11.2 billion for Pixar and Marvel, has said memorable characters will be valuable no matter what medium they appear in.
Disney paid $7 billion for animation studio Pixar in 2006 and bought Marvel Entertainment in 2009 for $4.2 billion, adding the creators of “Toy Story” and “The Avengers” to the company’s ranks.
Net income in the year-earlier quarter was $1.09 billion, or 58 cents a share. Disney’s net profit for the full fiscal year increased 18 percent to $5.68 billion, while sales climbed 3.4 percent to $42.3 billion.
Sports rights costs for cable TV will be $170 million higher in the current first quarter of fiscal 2013, the company’s Chief Financial Officer Jay Rasulo said in the conference call yesterday. Operating income at the film studio will decline by more than $150 million in the quarter, he also said, due to the strong performance of “Cars 2” and “The Lion King” in 3-D in the same period last year.
Revenue of $500 million will be generated by a new cruise ship, attractions at the company’s California Adventure resort in Anaheim and other park enhancements. These will be offset by investments in theme parks in Orlando, Florida, and Shanghai this fiscal year, Rasulo said.
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