Disney stock gets socked

Analysts' earnings revisions spur sell-off on Street

NEW YORK — In a sign of growing jitters on Wall Street about sky-high stock prices, Walt Disney Co. stock dropped 5% to $104.68 Wednesday after two Wall Street analysts cut their second-quarter earnings estimates for the Mouse House.

Disney stock recovered slightly to end the day down $3.12 to $106.87, but the stock has now come down 8% from the high of $115.75 it hit last week.

Schroders analyst David Londoner and Goldman Sachs analyst Richard Simon triggered Wednesday’s sell-off by reducing their earnings estimates after indications from the company that recent film releases “Krippendorf’s Tribe,” “Kundun” and “Deep Rising” would not do as well as hoped, and that ABC’s mid-season replacements were not working.

The earnings changes were not hugely significant: both analysts cut their prediction for Disney’s March quarter by just 4¢ a share to 51¢ a share, while Londoner cut his estimate for full-year earnings from $3.20 to $3.13 a share.

Londoner downplayed the significance of the earnings revision, and said Wall Street had overreacted. “This is just a very nervous market” reacting to “historically high valuations,” he said.

Some on Wall Street warned that the sell-off was a sign that stocks, both generally and in entertainment, are getting pricey. At Disney’s recent trading levels, the stock is higher than it has ever been in the past as a multiple of earnings, analysts said. Multiples of earnings are the most common measure of stock valuations on Wall Street.

Of course, Wall Street’s long-running bull market has taken most major companies in most industries to record-high prices. The difference now is that until last year, Disney was the only entertainment stock to have enjoyed the rally — but in the past year, other major entertainment stocks have joined in.

Time Warner Inc., for instance, closed up Wednesday 94¢ to a new all-time high of $69.87, compared with its price of around $38 a year ago. Viacom Inc., which has promised to sell Simon & Schuster and whose Blockbuster video rental unit is showing early signs of turnaround, has seen its stock climb to Wednesday’s close of $48.75 — up from $25 last summer.

News Corp., which lags most other entertainment stocks, rose 25¢ to an all-time high of $26.12. Among the majors, only Seagram Co. Ltd. remains depressed — but only because of the impact of the Asian economic slump on Seagram’s beverage earnings.

The stocks are “not in nosebleed territory yet, but to go significantly higher you have to assume everything goes right,” said Lehman Bros. analyst Larry Petrella. He is particularly cautious on Viacom, whose stock would likely drop sharply if Blockbuster’s turnaround doesn’t materialize on time.

When stocks are as “richly valued” as Disney, they “can’t handle disappointments relative to expectations, no matter how unimportant in the grand scheme of things the disappointments are,” said Larry Haverty a senior VP with money managers State Street Research.

Still, Haverty is bullish on most of the entertainment sector. He said Disney, like the rest of the Dow Jones Industrial Average’s 30 stocks, had become expensive, but argues Time Warner and Viacom are trading at “quite reasonable” levels.

Indeed the bulls appear to outnumber bears on Wall Street generally. As recently as Tuesday, Salomon Smith Barney’s Krutick upgraded her recommendation on Time Warner, arguing that the stock will move up a lot “over the next several years” as Time Warner management lifts earnings and cuts debt.

Merrill Lynch analyst Jessica Reif Cohen, similarly, sees Time Warner stock hitting $90 in the coming year and says she will lift her earnings estimates if Warner Music’s turnaround accelerates. She says Viacom can go as high as $55, topping its previous high of $54 it hit in the fall of 1994.

Furman Selz analyst Stewart Halpern argues that Disney stock is inexpensive compared with other major U.S. companies like Coca-Cola and Procter & Gamble. Halpern notes that, even taking into account a 5¢-a-share reduction in earnings in the second quarter, Disney’s profit will still grow 22% this year.

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