AUGUST 8, 2003
STREET WISE
By Ronald Grover
Disney's Hunt for a Happy Ending | Hit movies have boosted earnings. However, from the theme parks to ABC to Pixar, Mouse House problems are stifling the stock
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In Finding Nemo, this year's animated blockbuster from Walt Disney, a timid clownfish searching for his son struggles against all odds. Disney (DIS ) can relate. Hammered by falling ratings at its ABC network, a prolonged travel slump that savaged its theme-park business, and an economic slowdown that crimped sales of Mickey and Minnie merchandise, Disney has been looking to sprinkle some magic on its balance sheet. Now, at long last, it appears that Sleeping Beauty might be waking up.
On July 31, Disney reported third-quarter earnings of $400 million, a 9.9% hike from a year earlier and slightly better than a consensus estimate from analysts polled by Thompson First Call. Revenues increased by 6.6%, to $6.18 billion, from $5.8 billion a year earlier.
The results, while impressive, don't give the complete picture, however. Disney's turnaround is still a work in progress. True, the movie studio is hitting on all cylinders, with Finding Nemo swimming past $320 million at the box office and the Jerry Bruckheimer-produced action film Pirates of the Caribbean closing in on $220 million. But Disney is still hampered by lackluster performance at its giant theme-park unit, which, in better times, contributed about half of operating income. To date, theme-park earnings are down 22% on last year.
WAITING AND WATCHING. Small wonder many analysts continue to keep Disney on their neutral lists, awaiting the improvement of the world economy. Others worry that Disney may be overpriced. Its stock, trading at $21.65 as of Aug. 7's close, has run up 30% in 2003, thanks to prerelease buzz about Nemo and the return of advertisers to ratings-challenged ABC.
However, most analysts don't see any big pickup soon. Merrill Lynch's Jessica Reif Cohen, who has a neutral rating on the stock, figures Disney's shares "have potential to rise to the mid-$20 range." (In its annual report, Merrill says it has done investment banking for Disney in the past.)
J.P. Morgan's Spencer Wang points out that Disney trades at 12 times cash flow, slightly ahead of other media-company valuations, and like a number of other analysts, he urges caution. "We believe the market has already discounted much of the earnings recovery in financial year 2004," Wang wrote recently. "We would look for a more attractive entry point before turning more aggressive." He has a neutral rating on the stock. (In its annual report, J.P. Morgan says it has done investment banking business with Disney.)
VANISHED VISITORS. Analysts would like to see the return of free-spending international travelers to Walt Disney World in Orlando, which gets nearly one-third of its visitors from overseas, or to the trio of Disneyland Resort hotels in Anaheim, Calif. Instead, attendance at Disney World this summer has been off by 8%. And while Disneyland -- which relies less heavily on foreign tourists -- saw attendance rise by 7%, many of those visitors hailed from close by. Such patrons tend to spend less on food and lengthy hotel stays, further cutting into the parks' operating earnings.
When will they come back? Disney executives don't sound terribly optimistic. "A dramatic uptick in visitation is unlikely in the near term," admits President Robert Iger. Indeed, SG Cowen analyst Lowell Singer figures it may take until mid-2004 before European travelers return to the U.S. in sufficient numbers to help Disney (see BW Online, 8/8/03, "The Travel Industry's Summer Bummer").
In the meantime, the Mouse House is heavily discounting travel packages and ticket prices to generate what business it can from those markets. Travelers can get seven-day Disney World packages for the price of a four-day trip. And in California, a four-day pass to Disneyland and the adjacent Disney California Adventure in Anaheim is going for 50% off the daily ticket price.
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Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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