Disney Earnings Preview: Feeling The Force Of Lucasfilm With Lower 1Q Profits

The Walt Disney Company (NYSE:DIS) is expected to report lower profits on higher revenue Tuesday following an eventful fiscal first quarter that included Superstorm Sandy and the $4.05 billion acquisition of Lucasfilm and the “Star Wars” franchise.

The world’s largest media conglomerate, headquartered in Burbank, Calif., is expected to show net income of $1.4 billion, or 76 cents a share, for the three months ended Dec. 31, 2012, down 4.8 percent from $1.47 billion, or 80 cents a share, for the year-earlier period. Total revenue expected is $11.21 billion, an increase of 4.1 percent over last year’s $10.78 billion, according to analysts polled by Thomson Reuters.

Financial results will be reported on Tuesday, Feb. 5, at approximately 4:15 p.m. EST, with a webcast to follow at 5:00 p.m.

By far, the biggest news from Disney during the last quarter was the purchase of the Lucasfilm production company from its chairman and founder, George Lucas, who owned 100 percent of the company. The $4.05 billion deal further solidified the legacy of Robert A. Iger, Disney’s chairman and chief executive, who took over for Michael Eisner in 2005 and has since ushered in an era of aggressive acquisitions that includes Pixar and Marvel Entertainment, both of which have proved enormously successful.

At the time of the Lucasfilm purchase in late October, Disney’s CFO, Jay Rasulo, warned that the transaction would probably dilute earnings per share of Disney stock by low single-digit percentages in the short term, but there is a light at the end of the tunnel, or rather a force -- namely, the continuation of the $30 billion global “Star Wars” franchise.

“The financial effect of the deal is expected to include earnings dilution in fiscal 2013 and fiscal 2014, with accretion expected in fiscal 2015 when a new ‘Star Wars’ film is released,” wrote Jeffrey S. Thomison, an analyst with Hilliard Lyons, in a November research note.

According to research provided by Laura Martin, an analyst with Needham, revenue for Disney’s studio-entertainment unit is expected to decline by 5 percent compared to the same period last year, which set the bar unusually high. “Disney is expected to realize the results of a difficult comparison with the first quarter of 2012, which included the home entertainment re-release of ‘The Lion King’ and the release of ‘Cars 2,’ versus the current quarter, which included the re-release of ‘Finding Nemo’ and the release of ‘Brave,’” Martin wrote.

Disney shares are also likely to be impacted by the effects of Superstorm Sandy, noted David Miller, an analyst with B. Riley & Co. The storm that pummeled the Tri-State Area in late October forced some 40 Disney stores to close their doors for three days. It also grounded Orlando-bound flights from Northeast airports, which impacted attendance at Walt Disney World and other Disney theme parks.

Overall, Miller characterized fiscal-year 2013 as a transitional year, “as Park gains on the top line will likely be offset by incremental promotional spending for new projects in Orlando and the Cruise line.” One of those projects, MyMagic+, combines an interactive website and mobile app with an all-purpose RFID electronic bracelet that tracks the purchases and activity of Disney park visitors. Despite concerns from privacy advocates, the system is expected to revolutionize Disney’s abilities to collect data on its customers and track consumer behavior.

Disney’s largest unit (the media networks unit, which includes broadcast and cable) is expected to report revenue of $4.89 billion, up 4 percent over last year, and operating profit of $1.23 billion, up 3 percent, according to Martin. Results within the unit are expected to be impacted by $170 million in higher sports programming expenses, namely fees for the rights to broadcast games on ESPN and other networks.

Despite lower profits for the quarter, analysts are still generally optimistic about Disney stock, if less so than they were three months ago. Out of 31 analysts, 17 rated Disney stock “buy.”

Shares fell 35 cents to $54.24 in midday Monday trading.

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