Pali Analyst Greenfield Slaps "Sell" On Disney

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Despite having what he claimed to be the best asset mix in the media sector, a conflagration of bad luck has hit The Walt Disney Co. this year, according to Pali Research's Rich Greenfield. And that has forced the sometimes controversial media analyst to lower his rating on the stock from "neutral" to "sell," and reduce his 12-month price target on the stock to $12.50 per share.
In a research report late Monday, Greenfield wrote that despite that asset mix - cable, broadcast, movies and theme parks - "essentially everything is going wrong at the same time, with the length of pain likely to extend further than we had previously expected."
Greenfield pointed to disappointing box office performance at its movie unit - the Jonas Brothers 3-D concert movie reaped just $17 million in 10 days, compared to $53 million from a Hannah Montana 3-D concert film in the same period last year.
The pain is being felt company-wide: in the fiscal first quarter revenue fell 8% and operating income plunged 26%.
"We believe 2009 is shaping up to be a very challenging year," Greenfield wrote.
And while Disney has been able to soften the economic blow at its theme parks -- most notably Walt Disney World in Orlando -- by offering discount packages, a prolonged recession could hurt the business.
"The real problem for Disney becomes what happens if the economy does not begin to recover in the near-future, meaning Disney laps the benefit from these successful strategies leading to a continued slide in 2010 revenues and profitability; implying that 2009 will NOT be the trough by any means for the parks." Greenfield wrote.
Adding to the pressure, Greenfield wrote, is that while Disney has a strong balance sheet -- leverage was about 1.3 times cash flow at the end of 2008 -- rising capital expenditures and falling cash flow could make it difficult for the company to repurchase stock over the next 10 months. Buybacks have been a key tool to drive earnings over the past few years, the analyst wrote.
Disney stock, already down about 33% this year, after falling 29.8% in 2008, closed at $15.59 each on Monday, down 1.5% or 24 cents per share.

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