Is the Mouse Out of Its Hole?

Disney's most recent numbers have analysts lifting estimates for next year. Maybe dreams really can come true

By Ronald Grover

Suddenly, it may just be that the Mouse can fly. At least that's what a growing number of analysts are starting to say about Disney (DIS ), long a Wall Street wallflower.

On Nov. 19, A.G. Edwards' Michael Kupinski increased his stock-price target, saying Disney's recent performance "capped the end of a solid recovery year." Kupinski projected that Disney, which has traded in the $22-to-$26 range for most of the past six months, would hit $30 a share, a $2 increase on his previous appraisal. That news helped lift the stock almost 2%, to $27.19 on Nov. 19, and to sustain incremental gains through Nov. 23, when it closed at $27.32. (A.G. Edwards owns Disney stock; Kupinski does not.)


  Kupinski's bullish perspective came just days after Disney reported a 24% hike in net income, to $516 million (25 cents per share), in the quarter ended Sept. 30, vs. $415 million (20 cents per share) in the same quarter last year. The Magic Kingdom also reported full-year earnings of $2.3 billion for the fiscal year ($1.12 per share), vs. last year's $1.3 billion (62 cents per share). Minus a small tax gain, the $1.08 earnings-per-share number beat the $1.06 First Call consensus. And Disney executives have reiterated that they expect to see double-digit growth in fiscal 2005 earnings.

Even with the revival, the media giant's earnings are still below their 1997-98 levels, points out Fulcrum analyst Richard Greenfield. (Neither Greenfield nor Fulcrum owns Disney stock.) Disney's magic was at its most potent on the Street in 1998, when it hit $124.56 before a 3:1 split later that year.

"The key issue now," Greenfield stresses, "becomes growth from here forward." The analyst, who has a neutral rating on the stock, sees several issues Disney needs to address, including renewing a potentially pricey NFL contract for its ABC and ESPN networks (see BW Online, 11/17/04, "The NFL's Big Score").

With Disney's motion-picture division also showing a weak year compared to the boffo performance of 2003, Greenfield figures the Mouse House desperately needs to renew its soon-to-expire distribution agreement with Pixar (PIXR ). The computer-animation powerhouse produced 2003's Finding Nemo for Disney and this year's The Incredibles. "Disney needs Pixar more than Pixar needs Disney," asserts Greenfield, who adds that Pixar will likely try to renew its agreement sometime in mid-2005, when the Disney board is expected to name a successor for retiring CEO Michael Eisner.


  Fortunately for Disney, some of its long-suffering units are finally starting to show some life. At ABC, which last year lost $300 million, freshman show Desperate Housewives alone should generate earnings of $104.7 million this year, according to Merrill Lynch analyst Jessica Reif Cohen, who sees the turnaround largely priced into the share price. Currently trading at around 10.2 times next year's estimated earnings before interest, depreciation, taxes, and amortization (EBIDTA), Disney is in line with other Big Media outfits.

Reif Cohen has increased her estimate for next year's EPS to $1.23, a 14% hike on her previous estimate of $1.20. Cash flow could suffer from added expenses at the theme-park unit and some of the newer TV shows that weren't included in the 2004 figures. (Merrill Lynch has done business with Disney in the last 12 months. Cohen does not own the stock personally.)

The overall picture leads Reif Cohen to hint that Disney could be headed to $30 a share -- although she wouldn't be "comfortable with fair market value beyond $30-ish," which would be a multiple of 24 times her 2005 EPS target of $1.23. In its mostly strong years between 1987 and 1997, Disney traded at an average p-e of 21.7, says Prudential Equity Group analyst Katherine Styponias, who notes that it sometimes soared to 27. Styponias has lifted her target price from $28 to $32. (Sytponias does not own the stock.)


  Disney has room to grow in its networks group, Styponias figures, which includes ABC, as well as cable operations ESPN, Disney, and other channels, where advertising and ratings are growing. Moreover, she says a rebound in bookings by Disney's theme parks could lift EPS by as much as 20% in 2005. Despite the flagship Orlando park having suffered a three-day loss of business due to hurricanes and reduced hours on five other days, the overall theme-parks operation still managed to report an increase in fiscal 2004 revenues of 11%, to $8.3 billion, and an 8% hike in operating revenues, to $1.08 billion.

So, has Mickey found his mojo? Could be. Analysts who until recently were unhappy with the Magic Kingdom's numbers, strategy, and leadership are suddenly thinking the stock has some zippedy-doo-dah. A lot can change -- and evidently has -- when folks begin returning to theme parks and tuning in to a hit show like Desperate Housewives. In the entertainment world, surprises sometimes come quicker than you can say "Jiminy Cricket."

Grover is BusinessWeek's Los Angeles bureau chief

Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal.