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Eisner's Lucky Numbers

By Ronald Grover Disney Chief Executive Michael Eisner seems to have more lives than Snow White has dwarfs. Indeed, the harder dissident former directors Roy Disney and Stanley Gold force the idea of Eisner's mismanagement of the entertainment giant, the more it looks as if the big guy will beat them back. The odds now favor Eisner surviving through this year, at the very least -- and he just may make it well into next year, too, when his contract expires (see BW Online, 5/17/04, "After Eisner: Stanley Gold's "Short List").

Eisner's latest coup came on May 12 when Disney (DIS) reported the kind of blow-out numbers that put the magic in the Magic Kingdom. Indeed, a 71% hike in net income for the second fiscal quarter, which ended on Mar. 31, deposited $537 million to the bottom line on revenues of nearly $7.2 billion.

O.K., not absolutely everything went in Disney's favor. The media and entertainment giant took writedowns related to a couple of box-office bombs, Home on the Range and The Alamo, and no one knows when the ABC network will recover from its ratings swoon.

SHOW-ME STOCK. Still, much of Disney was firing on newly recharged cylinders. Folks were streaming back into the theme parks, with international visitors up 20% over last year and operating income up by an impressive 21%. ESPN continued to knock 'em dead, pushing Disney's TV operations (which include the woebegone ABC network) up by 76%. Even Disney's long-suffering consumer-products business turned up the heat, selling enough of those Mickey and Winnie the Pooh tchotchkes to increase operating earnings by 42%.

Heck, things are looking so swell that Disney Chief Financial Officer Tom Staggs says the company is increasing its earnings forecast for the entire year to 50% over last year's, up from the 40% hike that had been predicted only a few weeks back. So why, instead of soaring like Aladdin's magic carpet, did Disney's stock go up a measly 1.3%, to $23.30 on the earnings news?

Disney, unfortunately, has become a show-me stock. Analysts can do the math: If net income jumped by 71% in the second quarter, and the company is projecting 50% growth over last year, they figure that must mean a slowdown is on the way. "Our primary concern with Disney is its ability to generate sustainable growth," wrote Richard Greenfield of Fulcrum Group. Merrill Lynch's Jessica Reif Cohen was even more direct: "We are maintaining our neutral rating on Disney, in large part given the anticipated second-half slowdown in operating income [as implied by management's earnings guidance]."

THE EISNER DISCOUNT. Analysts say Disney's stock is unlikely to get much higher than, say, $28. Indeed, that's the average price over the next 12 months forecast by the 17 analysts who provided information to Thompson/First Call. That's not so great for a company that Eisner proudly told investors is "headed toward the kind of strong and steady earnings growth our shareholders have every right to expect."

Ironically, a big part of the problem is likely Eisner himself. The rank-and-file analyst community has lost a lot of faith in him. They have seen the failure to get a new contract with Steve Jobs and his blockbuster-creating Pixar Animation Studio PIXR) as "an Eisner issue," forgetting for a moment that Jobs threw out some pretty steep terms. And lately, it appears that things are less than rosy between the Disney CEO and Miramax' contentious Co-Chairman Harvey Weinstein, who could well leave after 2005, at the end of his own contract. What's the Eisner discount? Maybe 10% to 15%, figure some Disney investors.

So why bet that Eisner will stay put? Well, it's awfully hard to kick out a guy -- at least immediately -- who just reported earnings that outpaced expectations. Even the protests of Roy Disney and Gold, who correctly point out on their Web site that this year's earnings will match those of seven years ago, seem to be falling on deaf ears.

But Disney and Gold, who had contemplated a special "consent solicitation" to elect their own board members back in March, now seem likely to wait until Disney's next annual meeting, in early 2005. The company is expected to meet next week with the managers of state pension funds, which are among the largest shareholders. You can bet they'll squawk about Disney's still moribund stock price, but they also can't do much about it.

"QUESTION MARKS." None of which means Eisner has much wiggle room in the coming months. One screwup, no matter the magnitude, could send the boo birds back out to the bleachers. What might some of those horribles be? Pitiful ad sales at ABC, for one. The network will be lucky to stay even with last year, when the so-called upfront market for ad sales begins next week, thanks to a 13.7% drop in viewers between 18 and 49 -- advertisers' favorite.

As for the studio, Fulcrum's Greenfield sees what he calls "big question marks" surrounding Disney's two big summer releases -- M. Night Shyamalan's film The Village and King Arthur, from producer Jerry Bruckheimer. Then, there's just plain luck -- something always seems to whack Disney when it least expects it. In Eisner's favor are a strengthening economy and a Presidential race that will likely pump money into the coffers of Disney's TV stations.

No, it ain't pretty at Disney, which seems to enjoy little in the way of goodwill with the press, some of its investors, and much of the rest of the media world. But Eisner deserves credit for rallying the troops, putting up some healthy numbers, and buying himself more time. It's not called the Magic Kingdom for nothing. Grover is BusinessWeek's Los Angeles bureau chief. Follow his weekly Power Lunch column, only on BusinessWeek Online

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