Most are bullish on Disney's stock

Earnings report wasn't the end of the story, analysts say

Disney reported quarterly earnings last week and generated a slew of negative headlines. But several days and a bunch of analyst notes later, it seems the company's performance wasn't so bad after all.

Disney's stock closed Tuesday at $25.64, just 2% lower than it traded before it reported a fiscal third-quarter profit that fell 26% on revenue that slumped 7%.

Sure, Disney missed some estimates here and there, but only a handful of analysts seemed the least bit surprised. Most cut the Mouse some slack and maintained their bullishness, and Disney's intention to start buying back its own stock is a primary reason.

The company has authorization to buy 180 million shares, but it hasn't made any significant purchases since buying 47 million shares in fiscal fourth-quarter 2008, UBS Investment Research analyst Michael Morris noted.

"Share repurchases, along with investment in the expansion of brands like ESPN or the parks is a prudent use of capital," he said.

Morris did not alter his $30 target and "buy" recommendation on Disney. Instead, he found many reasons to praise the company after its earnings were released.

"We have limited hope for a significant near-term recovery but view Disney as well-managed and -positioned," he said.

Although revenue at Disney's biggest division -- media networks -- fell 2%, Morris crowed that "the rate of ad erosion at both broadcasting and cable nets was either stable or improved in the quarter."

Barclays Capital analyst Anthony DiClemente was even more enthusiastic after Disney's results, maintaining his $32 target on shares.

"We continue to advocate ownership of Disney, which we view as a best-in-class global entertainment company well-positioned for the structural changes we have anticipated," he said.

Disney's theme park and travel division had been of particular concern, given that a weak economy rampant with unemployment should discourage many from vacationing and even "staycationing." But DiClemente didn't seem bothered much that Disney reported a 9% drop in revenue at that unit, even though it was some $80 million below his estimates.

"We believe Disney parks has been weathering the difficulties well, cutting costs and producing higher margins amidst the revenue declines," he said.

Disney, in fact, is DiClemente's top pick in the entertainment space for four reasons:

-- Its cable TV networks alone are worth about $24 a share.

-- After two quarterly declines at the film unit, disappointment there already has been priced into the stock.

-- Theme park bookings for the second half of the year are "surprisingly stable."

-- "Normalized earnings-per-share power" of $2.35 yields more than the $32 price target, assuming a price-to-earnings ratio of 14.

Of course it wasn't all clear sailing for the company. Some recent Disney bears, for example, reside at JPMorgan, and they cut their rating on Disney to "underweight" after the earnings results with a target of just $22. They predict that ESPN, theme parks and consumer products will "be a headwind for the company's earnings."

And Steve Birenberg of Northlake Capital Management said Time Warner and Viacom reported better quarterly results than Disney did and that both are better investments because of Disney's richer valuation.

Then again, Avi Salzman of Barron's also takes on the valuation question but concludes the opposite. Disney, he wrote, trades at a 14.6 estimated earnings multiple for the next four quarters compared with 13.6 for others in the industry, but it deserves the premium.

And finally, maintaining her stance right down the middle is Laura Martin from Soleil, who maintained her "hold" recommendation and $25 target, advising that clients wait for the stock to fall some more before picking up shares.

Martin praised such films as "Up," "The Proposal" and "G-Force," but she asks a question that entertainment companies in general must answer, not just Disney: How, and when, will media companies use the Internet to profitable advantage?

"There is a culture of free on the Internet that puts pressure on old-world content prices and may undermine premium content's economic model," she said.
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