I don't get it.
Dramatically slashing his price target from $36 to $26, Citi analyst Jason Bazinet downgraded shares of Disney (NYSE: DIS) to "sell" this morning,
His reasons for concern are the ones you'd expect. "As energy costs remain stubbornly high, the housing market falters, and equity values pull back, we think it's only natural for consumer spending to slow," Bazinet writes.
But these issues have been around for several quarters now. Those $3 gallons of gasoline didn't get in the way of road trips to Disney World or Disneyland this past summer.
In fact, Disney's theme parks posted double-digit top-line gains just this past quarter. The same can't be said of smaller regional amusement-park chains, such as Cedar Fair (NYSE: FUN) and Six Flags (NYSE: SIX), which struggled to keep the turnstiles turning.
Bazinet also alludes to recent last-minute discounting at Disney-owned hotels as a sign that trends are turning. Granted, Disney isn't immune to economic pressure. Its theme parks took a hit the last time the country dipped into a recession. However, Disney's parks also have a habit of bouncing back quickly.
It's not just that high-end vacations tend to hold up a little better than a day trip out to the area amusement park -- although there is something to that. Great Wolf Resorts (Nasdaq: WOLF), the company behind the lavish lodges with huge indoor waterparks, also came through with healthy year-over-year metrics in its most recently completed quarter.
The case for Disney's parks -- if not for Disney as a whole -- is that we really do live in a global marketplace these days. And we can't overlook that Disney is on much sounder fundamental footing now than it was the last time the economy took a slip.
It's a small world after all
Bill Mann's look at the banged-up buck shows us the blessings of a freefalling dollar. It makes homegrown products cheaper overseas, and the same goes for tourism. You might pay more to go to Milan or Paris, but the plunging buck also makes it that much cheaper for European and Asian tourists to vacation in the United States.
Some of those tourists go to Vegas. Others go to New York City. However, the sunny realms where Disneyland and Disney World reside are also popular escapes. If a family from Des Moines has to pass on its annual trip to Disney World, that's unfortunate. But Disney will probably find it more lucrative if the room our Iowans passed up goes to a family from Kyoto.
Regulars know how to save money at the parks. They bring their own snacks and juice boxes, and they leave the property to find cheaper meals. Foreigners, on the other hand, will stick closer to the familiar theme park. And since prices are lower than what they had back home anyway, they'll have no problem loading up on lavish dinners, not to mention souvenirs.
I'm not suggesting that Disney is better off without the locals. Ideally, it would attract everyone. However, our country's appeal as a tourist getaway gets more economical with every downtick of the dollar, and that scenario helps iconic destinations such as Disney.
More than just the Mouse
Disney has also evolved beyond its theme parks and animated features. The Disney Channel has become a rock star, after launching the careers of Hannah Montana and the High School Musical franchise. There's no denying that the Writers Guild of America strike is hurting Disney's ABC, but the company is blessed to have ESPN as a perpetual source of fresh content.
Disney's studio has improved, too, since it regained relevance in animation by acquiring Pixar. That move has also created a consumer-products boost, given Disney's fatter collection of characters. The company is also in the process of doubling its cruise-ship capacity.
In short, Disney is about more than just the turnstile clicks, even if I firmly believe that per capita guest spending will rise dramatically as a greater chunk of its theme-park attendance comes from out-of-towners.
Media is medium rare
My biggest beef with the Disney downgrade is the timing. Over the weekend, Barron's pointed out that Disney's price-to-earnings multiple is near a 10-year low. Yes, Disney is now trading at just 13.5 times this year's Wall Street target of $2.13 a share and 12.3 times next year's estimate.
Is Disney really worth a multiple in the low teens? The major networks are dirt cheap right now. CBS (NYSE: CBS) and NBC parent General Electric (NYSE: GE) are also fetching just 12 to 13 times forward profitability.
I'm not suggesting that one should back up the truck to the Mouse at the moment, but it certainly seems like a lousy time to bail on the family-entertainment giant. If the valuation appears reasonable, remind yourself that Disney has actually beaten analyst estimates in each of the past 11 quarters.
Maybe Bazinet has seen the cracks before anyone else has. Maybe next week's fiscal first-quarter report will prove Disney mortal. Such things would worry me if Disney were trading at some stratospheric multiple, but it's not. With the recent share weakness already discounting a lackluster report, I would argue that the bears need to worry more about the upside than the bulls do with the downside.
