Disney Falls Most Since 2008 on Consumer Spending Concerns

Walt Disney Co. (DIS), the world’s largest theme-park company, fell the most since 2008 on concern that slowing consumer spending and rising costs at the ESPN sports network may crimp profit growth.

Among the largest media companies, including Time Warner Inc. (TWX), News Corp. and Viacom Inc., Disney is the most exposed to consumer spending through its theme parks, as well as broadcast and cable-TV units, said Paul Sweeney, an analyst at Bloomberg Industries. Increasing costs to broadcast sports on ESPN and a declining DVD market may also hurt earnings, according to Matthew Harrigan, an analyst at Wunderlich Securities.

“Certainly there are cost pressures at ESPN and at the parks, but they were a little worse than I would have thought,” said Harrigan, who cut his rating on the shares to “hold” from “buy” after the company reported quarterly earnings.

The stock dropped 9.1 percent to $31.54 at 4 p.m. in New York Stock Exchange composite trading, the most since Dec. 1, 2008. With today’s decline, the shares have fallen 16 percent this year.

Net income rose 11 percent to $1.48 billion in the fiscal third quarter ended July 2, the Burbank, California-based company said in a statement yesterday after the markets closed.

ESPN Affiliate Fee

While earnings of 78 cents beat the 73-cent average of analysts’ estimates compiled by Bloomberg, they included 6 cents in deferred ESPN affiliate revenue that analysts expected in the fourth quarter. Without that fee, earnings would have fallen short, Harrigan said.

U.S. personal spending fell 0.2 percent in June, the fourth consecutive monthly decline. Federal Reserve Chairman Ben S. Bernanke vowed yesterday to keep borrowing costs at an all-time low to revive an economic recovery that’s “considerably slower” than expected.

Higher costs at ESPN and lower syndication sales at the ABC broadcasting network will lower this quarter’s earnings by 7 cents a share, Chief Financial Officer James Rasulo said yesterday on the conference call. The ESPN expenses are associated with new contracts to broadcast college sports, Major League Baseball, and the National Football League, he said.

“Earnings upside was less than met the eye,” Barton Crockett, an analyst at Lazard Capital Markets in New York, said in a note to investors. The fiscal fourth-quarter oulook is “muddied,” said the analyst, who rates the stock “neutral.”

Studio Costs

Studio entertainment operating income fell 60 percent to $49 million in the quarter. While “Pirates of the Caribbean: On Stranger Tides” earned more than $1 billion at the box office worldwide, “increased revenue was largely offset by higher marketing and distribution costs,” said Rasulo, the financial chief.

“The costs just need to be trimmed,” said Harrigan, the Wunderlich analyst.

Time Warner last week reported a 14 percent increase in second-quarter net income as revenue from its cable-TV, movie and magazine businesses rose.

News Corp. (NWSA) reported fourth-quarter earnings per share of 35 cents, excluding some items, beating the average estimate of analysts surveyed by Bloomberg by five cents. The shares rose 2.1 percent in after-hours trading at 4:22 p.m. New York time.

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editors responsible for this story: Cecile Daurat at cdaurat@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net

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