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For Disney, it’s a season on the brink

Analysts retool earning forecasts in light of lackluster pix

This article was updated at 9:15 p.m.

NEW YORK — Wall Street had instant qualms about Disney’s earnings prospects Monday after “The Alamo’s” forgettable opening weekend raised the specter of writeoffs on at least one of its last three releases.

Though highly unusual for a single movie to impact the stock of a media conglom, the Street’s jitters suggest just how sensitive investors are to any sign of Mouse House weakness these days.

Nervous traders lopped more than $1 billion off Disney’s market value in Monday trading after several banks predicted the company is facing hefty writeoffs of $100 million or more.

“The Alamo”s dismal opening weekend, combined with less-than-stellar B.O. for “Hidalgo,” plus anemic results from animated feature “Home on the Range” and the so-far lackluster “Ladykillers” had analysts retooling their earning forecasts with a fury.

That was despite some bulls’ belief that the market overreacted to a situation that Disney number-crunchers have already budgeted for.

While few seers admitted to being surprised by “The Alamo’s” Easter returns, pic’s puny $9.2 million opening weekend barely makes a dent in its estimated $140 million total cost.

Schwab Soundview analyst Jordan Rohan cut his profit forecast for the second quarter by 3¢ per share, indicating a writeoff well in excess of $100 million.

Rohan said “Alamo” could result in an $80 million charge on top of a combined $70 million writeoff for “Home on the Range” and “The Ladykillers.”

Goldman Sachs maintains the total quarterly writedown on “Alamo” will be more like $50 million, since the studio may have already accounted for some of the cost during its last, gangbuster film quarter.

Goldman analyst Anthony Noto said Disney would have needed to gross at least $20 million in the opening weekend to avoid a writeoff.

He also voiced concern about the marketability of historic epics.

” ‘Alamo’ is another historic epic genre film that has not ignited viewer enthusiasm. This trend signals a potential risk of wear-out for epic movies and consequently, we look for more cautious budgeting in films that carry the epic story line…,” he wrote in a Monday note.

Disney’s main tentpole this summer is just such another epic, “King Arthur,” another $100 million pic from producer Jerry Bruckheimer.

Chief financial officer Tom Staggs would not comment on any writeoff speculation but said in a statement that the company is “confident” in its ability to deliver attractive earnings growth.

“Assuming a continuation of the favorable economic conditions and trends we’re seeing, we believe that we will deliver earnings growth of more than 40% for this fiscal year,” the statement added.

Still, in the short term, the Street is not convinced.

At best, prognosticators are betting Disney can expect to see total U.S. B.O. of $60 million for “Alamo” with another $40 million or so from overseas.

Future DVD sales and TV deals can allay some, but certainly not all, of the difference.

“It’s certainly no ‘Gigli’, but it seems unlikely to do particularly well overseas,” one analyst said.

By contrast, “Home on the Range” should result in a significantly lower (if any) writedown.

The animated romp could still reap some $200 million in video/DVD and other merchandising revenue, Noto said.

Based on historic film tallies, Goldman Sachs reckons an animated film’s total U.S. box office averages around 4½ times its opening weekend total, with international sales roughly 1.2 times the U.S. total. Add in global homevideo/DVD sales, the bank said, and “Range” should be easily in the clear.

Smith Barney’s Jill Krutick agreed that “Range” could ultimately break even.

She thinks the film still has time to play out at the B.O., where it faces no real animated competition until DreamWorks’ “Shrek 2” unspools May 21. Krutick noted that the Mouse’s other recent animated slow-starter, “Brother Bear,” which grossed only $19 million in its November debut weekend, went on to gross $85 million domestically and $215 million worldwide.

Krutick nevertheless trimmed her forecasts for studio entertainment operating income for the current June (fiscal third) quarter by $100 million to $25 million. She remains bullish about the company’s full-year fortunes, however, predicting earnings will be up 49% over the previous year.

But while much of Wall Street was mourning the end of Disney’s hot streak (“Finding Nemo, “Pirates of the Caribbean,” “Lion King” DVD, etc.), the company late Monday reminded investors it was on track to outgun its own (conservative) performance targets for 2004.

Disney management had given itself a fair amount of wiggle room for full year fiscal 2004 and 2005, initially forecasting 30% earnings growth –despite the Street’s far higher expectations.

Mouse is expected to produce a reasonably pretty quarterly picture of the first three months of 2004 when it reports next month, thanks to lower TV costs, improved attendance rates at its theme parks and a few “surprise” improvements on “Nemo” DVD sales. A few accounting sleights-of-hand won’t hurt either.

Prudential analyst Katherine Styponias noted that while investors are agitating about poor ratings at ABC, the network enjoyed significantly lower costs this year compared with last year, when the unit wracked up a loss of $105 million due in part to NFL sports costs and Iraqi war coverage.

Disney’s theme parks are also back on track with attendance up nearly 15%, which should boost profits in that hard-hit unit by as much as 30% in the March quarter.

Filmwise, compared with last year, when “Bringing Down the House” and “Shanghai Knights” were ringing up some $160 million at the gates, Disney’s last quarter includes only midrange titles “Miracle” ($63 million) and “Hidalgo” ($58 million) to keep up the pace.

Styponias notes that the biggest hit could come from some $40 million-$50 million worth of marketing spending that may have been expensed late last month for “Home” and “Alamo.”

” ‘Alamo’ is disappointing, as we believe its international and homevideo revenue opportunities are far more limited than the animated ‘Home on the Range,’ ” Greenfield said.

He nevertheless thinks the company’s box office failure might actually translate into a share price gain. That’s because a fourth quarter could bring suitor Comcast back to the negotiating table.

Alternatively, a confluence of bad news at Disney could inspire more management or board changes.

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