Why Is Everybody Picking on Disney?

Disney (NYSE: DIS  ) is doing better than you think.

Sure, shares of the family entertainment giant have fallen by 35% since peaking in May. The first wave of headlines about its fiscal fourth-quarter report also haven't been kind.

  • "Disney's Not So Magical Moment," reads Forbes.com.
  • "Disney Net Slips as Slump Hits Home," goes The Wall Street Journal.
  • "Disney Misses Estimates as Theme Parks Suffer," says CNBC.

Now, if I can just borrow Mickey Mouse from the media firing squad for a moment, I want to point out that the report released Thursday night was actually pretty respectable. Blindfold off, Mickey. Now run!

Did Disney's net slip? Sure. Posted earnings of $0.40 a share for the quarter did clock in well below last year's $0.44 a share. However, once you back out a $91 million bad-debt charge related to its unfortunate receivable from Lehman Brothers, and a favorable tax resolution from last year's quarter, earnings on a per-share basis actually rose from $0.42 to $0.43.

Are the theme parks suffering? That's debatable. The company's parks and resorts division posted a 7% increase in revenue. Operating income did drop 4%, but that's the result of higher labor costs and the spike in fuel costs at its cruise line (which have since retreated dramatically).

I'm not suggesting that everything is zip-a-dee-doo-dah-riffic at Disney. Even on an adjusted basis, this is the first time that Disney has missed analyst estimates since CEO Bob Iger took over.

However, where is the love for the dependable ESPN and Disney Channel cable revenue, which is helping soften the blow of lower ad revenue at ABC? Where is the euphoric applause for the boost in Disney's consumer-product division from the popularity of Hannah Montana and High School Musical merchandise? 

These aren't banner times in the media industry. News Corp. (NYSE: NWS  ) shares were slammed this week after the company talked down its guidance. CBS (NYSE: CBS  ) shares fell on the week, even after increasing initially when the company reassured investors that it would keep its beefy dividend. Others, like Time Warner (NYSE: TWX  ) and Viacom (NYSE: VIA  ) , are holding up with their steady cable properties, but also feeling the sting of the fading advertising market.

So hang in there, Mickey. Keep dodging the premature firing squad. Things aren't great, and they won't get any better in the near term. However, the haircuts on the share prices in the sector are wildly disproportionate to the slip in fundamentals.

Recession or worse, entertainment still matters.   

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Longtime Fool contributor Rick Munarriz is mad about the Mouse and owns shares in Disney. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On November 07, 2008, at 3:00 PM, IrvThal wrote:

    Why is everyone picking on Disney? Because underneath its cash-churning exterior lies the cold, dead heart that used to beat so vividly. Disney's massive, enormous challenge is this: Get the consumers BACK after they take an economy-induced break. Parks were the leading cause of worry for the analysts, and they're slumping. Disney is now resorting to tactics that only its competitors used to do, things like "Buy 4, Get 3 Free."

    Guess what? Consumers get USED to that. Universal has never been able to get rid of its deeply, deeply discounted annual passes ("buy one day, get a year free") because once fire sales like that happen, consumers would rather wait until the NEXT sale.

    Disney is botching this one big time. No noticeable capital improvement in most of its parks (but a waste of good money "fixing" California Adventure), dramatically increased costs, remarkably less impressive "cast members," and an incessant and sometimes painful insistence that the parks are for kids ... ignoring the core adult consumer who have traditionally (despite Disney's absolute insistence) been the biggest spenders and the most loyal consumers.

    Disney's theme parks division is suffering and it's going to get worse before it gets better.

    Combine that with slumping ad sales, a questioning by Tom Staggs of whether online ads are actually effective, and an ignorantly blissful Andy Mooney over at Consumer Products saying holiday 2008 is going to be GOOD for Disney ... and you can see that Disney's management is woefully out of touch with what its consumers and advertisers want.

    I predict much tougher sledding ahead for Disney this winter, and well into FY and calendar 09.

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