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Disney feels some heat from Street

Communication doors opening

NEW YORK — Walt Disney Corp. has Wall Street wondering.

The Mouse will release fourth-quarter and full-year financial results today and follow up with an unprecedented conference call for analysts and investors hosted by chairman and CEO Michael Eisner. While many companies use such calls to explicate their numbers, this is a first for Disney.

Top that with an analysts’ meeting in Burbank next Wednesday and it seems that Disney, much maligned of late, has become the embodiment of open communication.

That tends to happen when a company’s stock is weak. Certainly no one expects particularly good news from the numbers today as homevideo and licensing continue to erode profits. On the other hand, the company’s movie arm could be headed into a major upturn, with several such potential blockbusters as “Toy Story 2,” “Dinosaurs” and “Fantasia poised for release.

Those businesses are all part of Disney’s Creative Content division, where operating income is expected to plunge 47% compared with a year ago. Disney’s overall operating income for the fiscal year ended Sept. 30, is seen dipping to $3.3 billion from $4 billion. Anticipated revenue of just under $24 billion compares with $22.9 billion a year ago.

The results will follow disappointing third-quarter numbers that decimated the stock and prompted a wave of negative press. Disney subsequently sold its Fairchild Publications to Conde Nast for an estimated $650 million and is considering unloading its Anaheim sports teams.

Park biz trouble

Several days of hoopla this week over an impressive theme park project in Hong Kong won’t change the fact that the park biz could be under pressure. Construction in Anaheim of a new park, California Adventure, could soften attendance at adjacent Disneyland next year and analysts expect a competitive pinch from Universal Studios’ new parks.

With the company under the gun, several Wall Streeters predicted writedowns for today and restructuring charges to clear the decks ahead of next week’s meet.

“They need to take charge. To redefine people’s expectations and urge them to look forward and contemplate events coming up. If not, the stock could drift even lower,” said one big fund manager with a position in Disney.

Cost cutting likely

Cost cuts are likely, along with a big drop in capital spending. Analyst Alan Gould of Gerard Klauer Mattison is looking for a writedown, maybe a hefty one, tied to Monday Night Football if accounting rules permit. Disney paid a whopping $4.4 billion, or $550 million a year, for NFL rights spanning 1998-2005 — up from $230 million a year in the previous contract. “The Street would certainly like to see them write that down if it will help earnings going forward,” Gould said.

Gould and others noted that the Mouse has also shifted a number of execs in recent months and could well opt to close certain departments, maybe a few Disney stores, and eliminate some positions — resulting in additional restructuring charges. A piece of the reported $250 million settlement with Jeffrey Katzenberg could also be hidden in any writedown.

Katherine Stymponias of Prudential Securities is hoping Disney will break out the various pieces of its business to give investors a better of idea of what’s happening where. The company reports financial numbers in three business areas, Creative Content, Broadcasting and Theme Parks. Walt Disney Studios, now buried in the content division, is having a nice run and prospects are bright — a fact that could be overlooked based solely on reported numbers.

Income from cable networks is also considerable, another analyst said, wishing Disney would specify contributions from its 80% stake in ESPN as well as interests in Lifetime, A&E and the History Channel.

The outlook near term for the company’s weakest links, homevideo and licensing, doesn’t look good.

Disney has rightly decided to rest its video catalog and let demand build. And the Disney merchandise just isn’t selling well, with analysts in agreement that the Disney stores need a complete and overhaul.

Disney shares closed Wednesday at $26.88, up 1.7%.

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