Inhabitants of the House of Mouse want to know: How long can Disney (NYSE:DIS) keep this up?
The entertainment empire, which spans television, movies, and theme parks, is on track to leave its earnings of yesteryear in the dust. Disney expects to grow its profits by better than 16% this year, and by nearly that much again next year. But critics are beginning to grumble that its hit Desperate Housewives series is running out of gas, that Lost is alienating its fan base with its on-again, off-again broadcast schedule, and that the recent five-week streak of top ratings at Viacom's (NYSE:VIA) CBS is looking less and less like a fluke.
Even the analysts are beginning to turn on Disney, predicting that Thursday's earnings results will show a year-over-year decline in profitability. Fools may be starting to worry that the House of Mouse might need to call the exterminator.
Bear in mind that if Disney's results underwhelm Thursday, it may be partly due to the company finally expensing its stock options issuances. Each quarter of this fiscal year, Disney will subtract $0.02 per share from its profits, which could be the difference between an increase or a decline in year-over-year profits.
Naturally, Foolish investors won't be fazed by the results. We're well aware that -- "generally accepted" or not -- GAAP is a malleable beast. What's more, we've tracked Disney's deterioration over the past couple of years by observing the company's free cash flow.
Over the past 12 months, Disney reported $2.8 billion in profits. Although that's an improvement over the previous 12-month period's $2.2 billion, it nonetheless far overstates the company's true cash profitability. You see, the same past 12 months saw Disney generate just $2.2 billion in free cash flow (about 20% less than GAAP profits).
Moreover, while the Mouse's profits appeared mighty by rising year-over-year, free cash flow production actually declined against the previous 12-month period, in which Disney generated $3.5 billion in free cash flow.
The only thing shocking about analysts' predictions of declining Disney profits is that they didn't see this coming earlier.
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Fool contributor Rich Smith does not own shares of any company named above.
