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Mouse House hit

Stock dips to lowest price in one year

NEW YORK — Stock in Walt Disney Co. dropped $1.37 to $24.43 Monday, its lowest point in almost a year, as investors reacted to the Mouse House’s warnings of a downturn in fourth quarter profits, which it issued at the end of last week.

Most Wall Street analysts downgraded their recommendations on Disney and cut their future profit estimates for the company in response to its statement late Friday that its full year profit would only be up slightly on last year, and that fourth-quarter profits would be down 31% (Daily Variety, Sept. 14).

Disney blamed the profit slump on one-time charges relating to downsizing its consumer products and film studio operations, as well as the impact of the Asian economic slump on its consumer products business and lower profits from theatrical releases through the year.

Disney stock has now plunged 43% from its peak in April, reflecting gradual deterioration in its profit outlook over the past few months. One analyst noted Monday that the latest estimate revisions was the fifth occasion for such changes in the past few months.

Most Wall Streeters are now predicting that the stagnant 1998 performance will hurt Disney’s profits in fiscal 1999, which begins Oct. 1. “It’s clear that with basic earnings lower and the trends continuing … ’99 should be lower than previously thought,” said Merrill Lynch analyst Jessica Reif Cohen. Disney declined comment.

The downturn is “not something that is going to turn around very quickly or easily because it is largely macroeconomic in nature,” said Cowen & Co. analyst Harold Vogel.

Other factors

Not only is the Asian slump hitting merchandising and the international homevideo business, but many on Wall Street are beginning to fret about the prospect of a U.S. economic slowdown on Disney’s theme park business.

Theme parks was the one division that showed strong growth through fiscal 1998, but its business is also showing some worrying signs. Its new Animal Kingdom park in Orlando, Fla., appears to be cannibalizing business from DisneyWorld’s other parks, analysts said.

Reif Cohen also noted that her firm, Merrill Lynch, is predicting the U.S. economy is entering a deflationary environment. “Then you are talking about no price increases at the parks,” she added.

Analysts are also doubtful that broadcasting will show much growth next year. The ABC network continues to be weak while opinions differ on whether ESPN can continue to post strong enough growth to offset the broadcast side’s weakness given the cost of the new NFL and hockey contracts.

“We have to take profits down for ESPN’s slower growth,” Vogel said, although some analysts argued that ESPN would get rate increases from cable operators next year to help offset the higher sports contracts.

Film hope

The film studio is the one area that may hold some hope for Disney in fiscal 1999. The record summer box office, from pics like “Armageddon,” did not translate into higher profits from theatrical releases for the studio in the quarter ending Sept. 30 but should inflate profits when those hit pics go into homevideo markets, Furman Selz analyst Stewart Halpern said.

That is partly because Disney takes a very conservative accounting approach and writes off marketing costs on pics in the quarter that the pics are released, rather than amortizing the market costs over the period of release like it does with negative costs.

Halpern said part of the studio’s problem in the 1998 fiscal year was that “they’re still living with the ghosts of poor performance 1997 product” because those pics are only now going into international homevideo.

Analysts noted that predictions for next year’s studio profits are extremely uncertain, however, as video profits from releases like “Armageddon” can be wiped out by losses on theatrical releases. And the consumer products division, part of the creative content division with the studio, is not expected to come out of the Asian economic slump anytime soon.

For these reasons, many analysts say they remain uncertain about the 1999 outlook for Disney. “Our confidence level for next year is not high,” said Lehman Bros. analyst Larry Petrella.

Reif Cohen said she estimates Disney will earn just 95¢ a share in fiscal 1999, 8% ahead of what Disney said Friday it would likely earn in fiscal 1998. Many other analysts are a little more optimistic, predicting $1 a share, but that estimate is 25% down on previous predictions for fiscal 1999 earlier this year.

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