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Walt Disney Co. (
DIS
) has fallen on tough times before, but 2001 might prove to be Chairman Michael Eisner's toughest challenge since taking the fabled company's helm in 1984. The entertainment giant has seen its market value slide over the past six months, from $88 billion to $61 billion. The latest bad news: Mickey & Friends sorely disappointed investors on Nov. 9 by reporting fourth-quarter revenue of $6 billion -- well below the $6.4 billion that analysts expected.
Looking ahead, Disney faces a potentially weaker advertising market in 2001 because of a slowing economy and declining ratings for ABC's smash hit, Who Wants to be a Millionaire. The television show has accounted for an astonishing 85% of the network's revenue so far in 2000, according Jessica Reif Cohen, a Merrill Lynch vice-president. Cohen is sufficiently worried about Disney's prospects to have downgraded the stock on Nov. 9 -- when it dropped to $37 a share -- from accumulate to neutral.
BUFFETT BAILS. The stock has since fallen even further, closing on Nov. 21 at $29.37 -- and many analysts think it hasn't reached bottom yet. For investors with a long-term eye, any further fall in share price might be an invitation to visit the Magic Kingdom.
Company execs are certainly upbeat. "There are always what-ifs in this business. Right now, there are a lot of high-profile what-ifs," says Disney Chief Financial Officer Tom Staggs. "What I certainly hope is that people focus on...the reason why Disney has performed so well over a long period of time. That's because of the strength of the assets and the franchises we have."
Perhaps Warren Buffett was among the first to sense trouble when he decided to dump much -- if not all -- of his company's huge stake in Disney in 1999. At one point, his Berkshire Hathaway's stake was valued at $1.5 billion, says Timothy Vick, a senior analyst for Arbor Capital Management and the author of How to Pick Stocks Like Warren Buffett.
For years, Disney was a favorite of Buffett's holding company, which discloses holdings above $750 million every year in its famed letter to shareholders. But Disney has disappeared from that elite list, notes Vick. "He would have had to sell more than half of his 51 million shares to fall below $750 million. The presumption is that he dumped all of it."
CASH-COW PLAYGROUNDS. The end of the Regis Philbin craze is really just a small part of the story since the network accounts for only about 17% of Disney's sales, according to analysts. And while Disney's worldwide amusement parks could suffer if oil prices continue to rise, economies stall, and consumer spending slips, the famed playgrounds remain cash cows. All told, they account for more than 25% of Disney sales, with a new park -- California Adventure in Anaheim, Calif. -- opening in February.
But before then, here's another interesting date: Nov. 28, when the Conference Board releases its latest consumer confidence index. If the number is slumping, Disney's shares could take a hit since the theme parks are so reliant on discretionary consumer spending.
Consumer spending also has a big impact on Disney's sprawling retail operations, where management has yet to correct recurring setbacks. Income from toy merchandising and Disney Stores declined in the fourth quarter. Merchandising "has been a problem child," says Christopher Dixon, analyst for UBS Warburg. In response, Disney has hired a new consumer-products and retailing chief, former Nike executive Andy Mooney, who replaced former division head Anne Asberg early this year.
GOOFY ON THE WEB. Then there's Disney Internet Group. It continues to bleed red ink, having lost $155 million this year, compared with $94 million the year before, excluding one-time charges. These losses were primarily related to the revamping of Go.com, Disney's portal. The huge loss suggests that Eisner & Co. still haven't figured out the Internet, despite reaping tidy profits at ESPN.com and ABCNews.com.
So what's to like? Not all of Wall Street has soured on Disney. A handful of analysts still rate the company a strong buy and say the stock doesn't have much downside left in light of the beating it has already taken. Most of the variables surrounding Disney shouldn't place too much pressure on its bottom line, those analysts say, adding that Eisner has a track record of strong profit growth, as well as a proven ability to pull the company out of difficult spots. "There will always be cycles in advertising. We've been through them before," says CFO Staggs, who feels ad-revenue worries may be premature.
In fact, established media titans such as Disney can withstand an ad downturn better than most. Furthermore, analysts stress that Disney's film and studio divisions are raking in stellar profits and should continue doing so next year.
ROOM FOR IMPROVEMENT. With potential blockbusters like Unbreakable, starring Bruce Willis, and the much-awaited 102 Dalmatians arriving in theaters, the film division remains Disney's shining star. "The film business is doing very well," says Dixon. But films and DVDs already account for almost 25% of Disney's revenue, so it's not likely the film division can do much more to make up for the weakness in other divisions.
Still, even the film business' strength has been called into question by some. They worry that strikes by actors and writers next year could affect the entire film industry. True, those potential labor woes may well be averted, but "it still adds a cloud of uncertainty over the entire industry," one analyst says. Then there's the pending merger of Time Warner and America Online, which would make a daunting competitor for Mickey's gang. Overall, "Disney really is a mixed bag right now," says Investec Ernst analyst Michael Davey. "They're not all that exciting. They're living off past luster."
But even the most critical analysts say they'd reconsider if the company stock falls into the $25 to $27 price range. At those levels, an investment is easier to justify because Disney improved its balance sheet this year by some $2.2 billion, decreasing debt from $11 billion to $9 billion. "There's a lot of room for improvement with the stock," says Angela Auchey, money manager for Federated Investments. So it might be worth keeping an eye on those mouse ears.
Shook covers financial markets for BW Online in New York Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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