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The Walt Disney Company delivered strong third-quarter 2012 results, driven by solid performances of Parks and Resorts and the Studio Entertainment business. The quarterly earnings of $1.01 a share surpassed the Zacks Consensus Estimate of 93 cents and jumped 29% from 78 cents earned in the prior-year quarter. However, including one-time items, earnings increased 31%.

Total revenue came in at $11.1 billion, up 4% year over year. However, it missed the Zacks Consensus Estimate of $11.2 billion. Total segment operating income increased 18% year over year to $3.2 billion.

Through its strong operating results, Disney continued to invest in its core businesses while expanding its operating margins. Moreover, the company remains well positioned to drive revenue in the coming years through its strategic initiatives.

Segment Details

Media Networks revenue increased 3% year over year to $5.1 billion, reflecting a 3% increase in Cable Networks and Broadcasting revenue. The segment’s operating income marked an increase of 2% to $2.1 billion. Cable Networks’ operating income inched up 1% to $1.9 billion driven by growth across ABC Family and domestic Disney Channels partially offset by a decline at ESPN. Moreover, operating income at the Broadcasting division increased 7% to $268 million, signifying increased affiliate and royalty revenues and lower programming and production costs.

Parks and Resorts revenue rose 9% to $3.4 billion, while segment’s operating income rose 21% to $630 million, reflecting higher revenues from domestic parks and resorts, Tokyo Disney Resort and Disney Cruise Line.

Despite difficult operating environment, the company did not change its strategies, but remained focused on deploying its capital toward expanding its Parks and resorts business, and in turn, enhancing its markets and creating long-term growth opportunities.

Studio Entertainment revenue remained approximately flat at $1.6 billion, while operating income surged to $313 million compared with $49 million in the year-ago quarter,  manifesting increases at worldwide theatrical results and worldwide television distribution from strong performance of Marvel’s The Avengers and Pixar’s Brave.

Consumer Products revenue increased 8% to $742 million, while segment operating income increased 35% to $209 million, reflecting revenue gains at Merchandise Licensing along with retail business.

Interactive Media revenue for the quarter decreased 22% to $196 million, while operating loss improved as the segment reported an operating loss of $42 million compared with $86 million in the prior-year quarter, due to strong games and online business.

Despite marking a decline in operating income, ESPN had a record number of viewers in the quarter, and remained the favorite destination for sports lovers. In the last few years, ESPN, with its right mix of exclusive sporting licenses and top sporting leagues emerged as an industry leader in the pay-TV industry.

Other Financial Details

During the quarter, Disney generated free cash flow of $2.1 billion. The company ended the quarter with cash and cash equivalents of $4.4 billion, net borrowings of $10.6 billion and shareholders’ equity of $40 billion, excluding non-controlling interest of $2.1 billion.

Strong results poise the company well to enhance shareholders value through share repurchases. During the reported quarter it bought back 8.6 million shares for approximately $373 million. Fiscal year-to-date, Disney repurchased 55 million shares for approximately $2.1 billion.

Walt Disney is one of the world's leading diversified entertainment companies. Moreover, the company commands a formidable portfolio of globally recognized brands, primarily its namesake brand Walt Disney, followed by ABC, ESPN and Marvel Entertainment. These renowned brands offer a strong competitive edge to the company and bolster its well-established position in the market against major players like News Corporation and Time Warner Inc. .

We maintain a long-term ‘Neutral’ recommendation on the stock. However, the shares of Disney currently retain a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

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