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The Walt Disney Company (DIS - Analyst Report) posted third-quarter fiscal 2013 earnings of $1.03 per share that came in line with the Zacks Consensus Estimate and rose approximately 2% year over year. Including one-time items, earnings remained flat at $1.01 per share.

Revenue came in at $11,578 million, up 4% year over year but fell short of the Zacks Consensus Estimate of $11,669 million. Total segment operating income increased 4% to $3,351 million, reflecting strong performance of the Parks and Resorts and Cable Networks division.

Segment Details

Media Networks revenue elevated 5% year over year to $5,352 million, reflecting an increase of 8% in Cable Networks to $3,884 million. Broadcasting revenue remained almost flat at $1,468 million during the quarter. 

The segment’s operating income marked an increase of 8% to $2,300 million boosted by a 12% jump in Cable Networks operating income to $2,087 million, which reflected higher affiliate revenue at ESPN, A&E Television Networks (AETN) and the domestic Disney Channels. This was partially offset by declines at ABC Television. Broadcasting operating income plunged 21% to $213 million, primarily due to decline in program sales and lower advertising revenue coupled with increased primetime programming costs.

Parks and Resorts revenue rose 7% to $3,678 million, while the segment’s operating income increased 9% to $689 million, reflecting higher revenue from domestic parks and resorts.

Disney remains focused on deploying its capital toward expanding its Parks and Resorts business, and in turn, enhancing its markets and creating long-term growth opportunities. Management stated that so far in the fourth quarter of fiscal 2013, domestic resort reservations are pacing up 3%, while booking rates are up 4% compared with the prior year. 

Studio Entertainment revenue dipped 2% to $1,590 million, while operating income fell 36% to $201 million, reflecting a decline in global theatrical distribution results and adverse impact of the pre-release marketing expenses for The Lone Ranger.  However, the company’s big-budget ‘The Lone Ranger’ failed to impress the audience for which it expects to register loss between $160 million and $190 million in the fourth quarter.

Consumer Products revenue increased 4% to $775 million, while segment operating income rose 5% to $219 million, reflecting gains at Merchandise Licensing and retail business.

Interactive revenue for the quarter decreased 7% to $183 million, while operating loss widened to $58 million compared with a loss of $42 million in the prior-year quarter. The decline reflected lower console game sales and a decrease in the social games business.

Other Financial Details

During the quarter, Disney generated free cash flow of $2,723 million, up 27% year over year. The company ended the quarter with cash and cash equivalents of $3,932 million, borrowings of $12,784 million, and shareholders’ equity of $43,536 million, excluding non-controlling interest of $2,371 million.

Strong cash flow generation poise the company well to enhance shareholders value through share repurchases. During the reported quarter, it bought back 12.6 million shares for approximately $800 million. Fiscal year-to-date, Disney bought back 57 million shares worth approximately $3.2 billion.

Our Recommendation

This Zacks Rank #3 (Hold) company remains well positioned to drive revenue growth through its strategic initiatives. The company’s investments in its core businesses are also aimed at expanding its operating margins.

The company’s content distribution agreements with Comcast Corp (CMCSA - Analyst Report), Netflix Inc. (NFLX - Analyst Report), Cox Communications and Charter Communications, Inc. (CHTR - Analyst Report) strengthened Disney’s multichannel subscription model by adding more platforms to deliver its content.

Moreover, we believe ESPN’s strong performance is likely to boost the results of the segment as it remains the favorite destination of sports lovers and has the right mix of exclusive sporting licenses with top sporting leagues.

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