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Wednesday August 20, 2014



A Less Than Magical Quarter for Disney

The Walt Disney Company (DIS) announced its third quarter results on August 6. The company's earnings did not match the magic of the comparable period last year, but earnings per share slightly outperformed analysts' expectations.

Third quarter revenue was $11.58 billion, an increase of 4% over the same period last year. Revenue was a slight disappointment as revenue was expected to be $16 million higher.

Disney reported earnings per share of $1.03 for the quarter, a 2% increase over the $1.01 per share reported during the comparable period last year. This modest increase beat consensus estimates that earnings per share would be flat at $1.01.

The company's lukewarm results were overshadowed by the failure of The Lone Ranger, just one of several big budget films that have flopped at the box office this summer. Disney expects to record a loss of $190 million on the film. That is unwelcome news to investors who have seen the company record similar losses on big budget misfires Prince of Persia: The Sands of Time and John Carter in the past few years.

"There has been a lot said I know about the risk of basically high-cost, tentpole films, and we certainly can attest to that given what happened with 'Lone Ranger,'" said Disney Chairman and CEO, Robert Iger. Despite the high risk, Mr. Iger justified the strategy, claiming it as one way to "rise above the din and the competition."

Mr. Iger may have a point as the company has found success with high budget films in the recent past, including The Avengers last year and Iron Man 3 and Oz the Great and Powerful this year. Indeed, investors are hopeful for the future because the company has added tremendous value over the past couple years with acquisitions of Marvel and LucasFilm, which have already added and most likely will continue to add further value to investors going forward.

The Walt Disney Company (DIS) shares ended the week at $64.72, down 2.68% for the week.

Time Warner Has a Strong Quarter

Time Warner Inc. (TWX) announced its second quarter results on August 7. The company posted impressive results all across the board, much of it the result of continued strong performance from its TV networks.

Second quarter revenue was $7.4 billion, a 10% increase over the comparable period last year when quarterly revenue was $6.7 billion. Revenue beat estimates and was driven by strong advertising gains of 11% at the company's cable network unit.

Net income for the quarter was $711 million, or $0.83 per share, a significant increase over the comparable period last year when net income was $413 million. Analysts had expected earnings per share of $0.75.

"We had a very strong quarter and first half financially and operationally, putting us on track for another great year," said Jeff Bewkes, Chairman and CEO. Mr. Bewkes went on to outline the tremendous success the company had during the second quarter, including strong ratings and advertising revenue for its cable networks, the popularity of programming such as Game of Thrones on HBO and theatrical success that included Man of Steel and The Great Gatsby.

Time Warner Inc. (TWX) shares ended the week at $63.40, down 1.15% for the week.

AMC's Earnings Blow Past Estimates

AMC Networks Inc. (AMCX) reported its second quarter results on August 8. The results beat Wall Street expectations, but the stock price still fell among concerns about higher programming costs needed to produce new content.

AMC reported revenue of $379 million for the quarter. This was a 15.8% increase over revenue of $328 million reported during the same period last year.

Earnings per share for the quarter were $1.87 compared to $0.57 during the second quarter last year. This number blew past estimates of $0.78 per share. The earnings per share figure was buoyed by a gain of $133 million relating to a settlement with DISH Network. Excluding the settlement, earnings per share were below estimates at $0.74 per share.

"In the second quarter, our successful original content drove our overall financial results, with a 16% increase in net revenues," said Josh Sapan, President and CEO of AMC. "Our original programming continues to fuel the performance of our networks and underpin the Company's growth, with last month's 39 Emmy Award nominations for AMC, IFC and Sundance Channel, the most nominations of any basic cable programming group, contributing to our momentum."

AMC's impressive quarterly results masked some upcoming difficulties for the company. Without the DISH Network settlement, earnings per share would have been below expectations. In addition, AMC incurred higher programming costs this quarter as it sought to develop new content to replace two of its hit shows—Breaking Bad and Mad Men—that are in their final seasons.

AMC Networks Inc. (AMCX) shares ended the week at $65.48, down 5.76% for the week.

The Dow started the week at 15,652 and closed at 15,426. The S&P 500 started the week at 1,708 and closed at 1,691. The NASDAQ started the week at 3,683 and closed at 3,660.

Japan's Mountain of Debt Keeps Rising

Japan's Finance Ministry reported that the nation's debt rose above one thousand trillion yen on Friday, August 9. The exact number, ¥1.008 quadrillion, is equal to about $10.45 trillion. This amount includes ¥830 trillion in government bonds.

Although the number is staggering, what is of particular concern to investors is Japan's debt in relation to gross domestic product (GDP). Gross domestic product represents the monetary value of all finished goods and services produced within a country's borders during a specific time period. The national debt as a percentage of GDP is one of the metrics investors use to determine the risk that a government will default on its obligations. The higher the debt as a percentage of what the country actually produces, the higher the risk of default. Japan's debt-to-GDP ratio is now over 200%, meaning their national debt is now more than double the country's production. In comparison, the United States debt-to-GDP ratio is now just over 100%.

Japanese debt has been driven in part by the increasing cost of social welfare programs. Since 1990, the amount spent on these programs has more than doubled to over ¥100 trillion.

As a result, Prime Minister Shinzo Abe is considering a sales-tax increase from 5% to 10% by 2015. This would help increase government revenue. "Tax reform and containment of social security expenditure would further reduce the government's budget deficit and enhance its debt-servicing capacity," said Thomas Byrne, Senior Vice President at Moody's.

Some analysts are concerned that such an increase in taxes might jeopardize economic growth. However, increasing government revenue may be necessary to reduce the debt's size. Whether it is accomplished though increased sales tax or in some other way, the Japanese government has now made it clear that reducing their national debt is a priority in the coming years.

The 10-year Treasury note yield finished the week at 2.58% while the 30-year Treasury note yield finished the week at 3.64%.

Interest Rates Remain Relatively Unchanged

On August 8 Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS). Average fixed mortgage rates remained virtually unchanged from last week despite the release of an unemployment report last week that fell below expectations.

The 15-year fixed rate mortgage averaged 3.43% this week, which was unchanged from last week. Last year at this time, the 15-year fixed rate mortgage averaged 2.84%.

The 30-year fixed rate mortgage averaged 4.40% this week. This represents a slight increase from last week when it averaged 4.39%. One year ago at this time, the 30-year fixed rate mortgage averaged 3.59%.

Frank Nothaft, Vice President and Chief Economist at Freddie Mac, commented on this week's rates. "Mortgage rates were relatively unchanged following a mixed employment report for July. Even though the unemployment rate fell to 7.4% in July, which was the lowest since December 2008, the economy added only 161,000 jobs, short of the market consensus forecast. In addition, revisions subtracted 26,000 workers in the prior two months. Finally, hourly wages fell 0.1% in July, representing the first decline since October 2012."

The money market fund finished this week at 0.4%. The 1-year CD finished at 0.6%.

Published August 9, 2013

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