Eisner Stirs Up Some Magic


By Ronald Grover There are still barbarians at its gates, but the Magic Kingdom is protecting itself. Disney (DIS) reported Aug. 10 that it earned $604 million, or 29 cents per share, for the quarter ended June 30, vs. $502 million, or 24 cents per share, in the same period a year ago on revenues of $$7.5 billion, a 17% gain. The results beat expectations by 2 cents a share. Results were led by a 20% rise in operating income at its theme parks, primarily Walt Disney World in Florida. Disney's cable unit, led by its sport powerhouse ESPN, increased by 15%. Strong numbers should provide ample -- though perhaps only temporary -- protection for CEO Michael D. Eisner.

Frolicking kids and free-spending parents are making Disney's theme parks the biggest growth driver this year, say most analysts, who also point out that Disney's studio division didn't do as well as in the year-ago period. Before the earnings release, Merrill Lynch analyst Jessica Reif Cohen had predicted the parks would benefit from "pent-up demand, a weak U.S. dollar, and improved affordability/frequency of flights to Orlando," where Disney has its largest concentration of theme parks. Turns out, she was right, although she expressed modest in a follow-up report that attendance in California was softer than she anticipated.

BOX-OFFICE BLUES. That's good news for Eisner, as former board members Stanley Gold and Roy Disney are expected to continue their fight to unseat him. At the annual meeting in March, Gold and Disney rallied shareholders unhappy with Disney's lackluster stock performance, spearheading a 45% vote against Eisner's reelection to the board. Within hours, the board stripped Eisner of his chairmanship and installed former Senator George Mitchell in his place. Eisner is counting on Disney's improving profitability to help him keep his job.

And indeed, Disney has had a resurgence of late. Earnings in the first two quarters nearly tripled from a year earlier, to $1.25 billion, from $350 million. In the same period of 2003, Disney was savaged by a falloff in the number of tourists visiting its theme parks. The stock price also got a boost this year. Through late June, it had increased by nearly 7%, though a string of box-office disappointments and general concerns about media stocks have since driven down the share price, with the stock closing at at $22.44 on Aug. 10, vs. $23.67 on Jan. 2. The average projected 12-month share price is $28, with 14 analysts rating it either a buy or a strong buy.

Disney's biggest drawback is its studios, which in the second quarter turned out such money losers as the animated Home on the Range and the bloated-budget bomb The Alamo, writes Bernstein analyst Tom Wolzien. He projects the studio division will lose $6 million, after gaining $71 million a year earlier on the strength of Finding Nemo, Lizzie McGuire, and the surprise hit Holes. Disney could write off $50 million alone from the woeful King Arthur, writes Deutsche Bank Securities analyst Douglas Mitchelson.

DVD DUDS. Wolzien rates the company outperform, with a 12-month target of $29, pointing to increased ad sales for cable channels, especially ESPN. Alas, the same can't be said for the network division. Most analysts believe ABC will lose money this year. Merrill Lynch's Reif Cohen notes that the network, a distant fourth among viewers 18-49, likely saw its upfront ad sales falling as much as 10%, to about $1.5 billion.

Disney could appease shareholders waiting for the stock to rise by increasing its dividend -- maybe even doubling its current annual payout of 21 cents, writes Citigroup (C) Smith Barney analyst Jill Krutick. She figures that Disney, with $2.5 billion in free cash flow this year, could well afford the added $400 million annually.

CONTRACT PLAYERS. Not all analysts are as sanguine about Disney, however. Fulcrum Global Partners analyst Richard Greenfield, who also has a neutral rating on the stock, worries that the theme parks can't sustain the boost in attendance they have seen. He also fears that Disney's less-than-scintillating box-office performance will hurt it into next year because the duds aren't likely to generate huge DVD or video sales. Disney acknowledged the potential for a slowdown in the coming quarter, which prompted CIBC World Markets analyst Michael Gallant to lower his 12-to-18 month target for the stock to $25 from his earlier $27, although he maintains his "sector perform" rating.

And Eisner faced some tough questions during his Aug. 10 conference call. He's still locked in protracted negotiations with Harvey and Bob Weinstein, the co-chairmen of Disney's Miramax film unit. The brothers are said to want out of their contract, which expires next year, but Disney has the option to extend it for four more years. Harvey Weinstein has made no secret of his desire to leave Disney before his contract expires, but noncompete clauses in his current contract could keep him in the fold.

Disney's relationship with Pixar (PXR), Steve Jobs's computer-animation studio that produced such blockbusters as Finding Nemo and Monsters Inc., is also in doubt. Pixar has been talking to other studios about distributing its films when its Disney contract expires next year. A break with Pixar could have a huge impact on Disney. Deutsche Bank's Mitchelson figures DVD sales of Finding Nemo generated $95 million in profits for the Mouse House in the third quarter.

LONG-TERM QUESTION. On top of that, Disney's 39%-owned Disneyland Resort Paris (home of the Euro Disney theme park) reported in early August that it needed more time to negotiate a financial restructuring plan with creditors. That prompted French analysts to speculate that the French park could be headed toward a bankruptcy filing. Disney has extended loans to the park and delayed payment of management fees and royalties it normally would collect.

All of this should make for lively conversation with analysts. But despite the questions and concerns Eisner will face, there's no denying that Disney's fundamentals are improving and that he is secure for now. The long-term question is what the numbers will mean when Gold and Roy Disney again storm the gates of the Magic Kingdom. Grover is Los Angeles bureau chief for BusinessWeek


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