Cheese for the Mouse House's Investors?
By Ronald Grover
It was probably a slip of the tongue. Speaking to an investor conference on Sept. 30, Walt Disney (DIS ) President Robert Iger noted that it was the end of Disney's fiscal year -- adding: "And what a year it has been. I'm not talking about takeover battles or shareholder issues," the Disney No. 2 quickly clarifies. "I'm talking about performance."
Indeed, the last year has had more dips and turns for Disney investors than Thunder Mountain. During that time, Disney withstood a hostile takeover offer from cable giant Comcast (CMCSA ) and weathered shareholder unrest that forced the board to strip CEO Michael Eisner of his chairmanship. The board has just launched a search for a successor to Eisner, who in his 20 years as Disney's chief remade the once sad-sack company into a world-class entertainment giant.
But Iger, the front-runner for Eisner's job, was there to talk good news, not turmoil, projecting that the outfit would report "better than 50% growth in earnings per share" when it announces end-of-year results on Nov. 18.
It's a point that hasn't been lost on investors. For the first time in years, Wall Street analysts believe Disney may be on the rebound: Its long-suffering ABC network is coming up with hits, theme-park attendance is up, and even Disney merchandise is starting to sell once more. All of this while ESPN and its other cable channels are starting to mint money.
The result: In the last two months Disney's stock has increased by 11%, to $24.88, outperforming the S&P 500 over that time, as well as competitors such as News Corp.(NWS ) and Viacom (VIA ). Since spring, four analysts who follow Disney have upgraded its stock, according to the Thomson Financial Network. Of 28 analysts following the shares, 15 now have a buy or strong buy on the stock.
The company isn't out of the woods yet. Its stock is trading significantly below where it was five years back, when it was in the 40s. It faces the possibility of losing key supplier Pixar Animation (PIXR ), which has created such animated megahits as Toy Story and Finding Nemo. And some of its board members are being dragged through a trial in Delaware, reliving the 10-year-old embarrassment of the $140 million that Michael Ovitz received for a rocky 15 months as Eisner's No. 2.
ABC IN THE BLACK.
But enough positives exist to cheer many investors. The key turnaround is at ABC, which has had hits with shows such as Desperate Housewives and Lost and has reversed its ratings free fall. Today the network's ratings are up 5% among the 18-to-49-year-old viewers advertisers most covet, according to Nielsen, moving ABC into second, behind CBS, for total viewers and into a tie for second, with NBC, for the younger demographic groups.
That ratings bump means a $300 million turnaround for the network, figures Merrill Lynch analyst Jessica Reif Cohen, who says ABC will swing from a loss to a small profit in the quarter. For the year, she predicts Disney's broadcasting unit (which includes the ABC TV stations) will show operating earnings of $270 million, up from just $37 million in 2003. Overall, Cohen has increased her fourth-quarter estimates for Disney to match the Street consensus of $0.17 a share -- up from her estimate of $0.14 a share.
Cohen isn't raising her neutral rating on Disney, which she believes is fairly valued compared to its peer group. But other analysts say the Mouse House is poised to see its shares climb. A.G. Edwards analyst Michael A. Kupinksi, who rates Disney an aggressive buy, targets the stock at $28 a share, a 12.5% increase over its Oct. 21 price. "We believe that the favorable operating momentum should continue through the fourth quarter and into next year," Kupinksi wrote in an Oct. 6 report. By Ronald Grover
NOT ALL CHEERY.
Kupinksi stresses that Disney's balance sheet is in good shape, now that debt levels have been cut, and that it has $3 billion in cash that could be used for share repurchase or dividend payouts. Indeed, Disney CFO Tom Staggs says the outfit has bought back more than $300 million shares already and is recommending a dividend hike to its board.
Disney is poised to boost revenues from its theme-park unit, which provides about 30% of the group's operating income, many analysts believe. Though the parks are susceptible to terrorism or an economic downturn, Prudential Equity Group analyst Katherine Styponias projects that the theme-park unit will see attendance grow by 5% at its California locations and 9.9% in Orlando. She sees the parks' earnings increasing to nearly $1.4 billion next year, from $1.1 billion this year. Overall, Styponias, who rates Disney "overweight," with a $28 price target, projects that the outfit will announce fourth-quarter revenue of $7.58 billion, up 3% from last year, with earnings higher by 4%, to $907 million.
Not every analyst is quite as cheery. CIBC World Markets' Michael E. Gallant cut Disney's fourth-quarter earnings-per-share estimates by 9%, to $0.18, due to a lackluster string of movies including Mr. 3,000 and Ladder 49 that hasn't matched last year's hits like Pirates of the Caribbean. He also thinks Florida's hurricanes will knock $45 million to $50 million off Walt Disney World's revenue.
But Gallant notes that Disney's cable unit will hike operating earnings in the quarter by 25%, improving its operating margins by increased advertising at its powerhouse ESPN and at once-struggling ABC Family, where he sees advertising sales climbing by 32%. And he sees earnings rising by 23% at Disney's consumer-products unit, in part because of selling its money-losing Disney Store chain and an uptick in its characters' licensing.
Still, Gallant recently removed his $25 price target for Disney stock, figuring a lot of the good news is already priced into Disney's stock. That may not be a ringing vote of endorsement. But after years of lackluster earnings, some on Wall Street still have a show-me attitude toward Disney -- even if, as Bob Iger says, it's having quite a year.
Grover is Los Angeles bureau chief for BusinessWeek
Edited by Thane Peterson
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