Pixar Deal Tempers Disney Rating

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Pali Research media analyst Richard Greenfield began coverage of The Walt Disney Co. with a “neutral” rating, although his view of the media giant is far more optimistic than in past years.

What’s holding Greenfield back from a “buy” nod? According to his research note, it’s valuation, which he believes limits the upside share price to $30 to $32, based on an expected slowdown in free cash-flow growth owing to the dilutive acquisition of Pixar Animation.

Over the past year, Greenfield’s two biggest concerns about Disney have been creative growth and the ability for ESPN to sustain high carriage fees given slowing affiliate fee growth and rising sports costs. He’s not as concerned about those now because, (A), the Pixar acquisition, while costly, should aid creativity, separately, Disney has rejuvenated its non-animation content and, (B), indications from management are that ESPN’s growth outlook is intact.

“Management recently disclosed that given its subscription fee outlook (based on long-term contracts with distributors) it was confident in achieving double-digit operating income growth through 2009, with no year dramatically below the double-digit range (we had previously expected fiscal 2007 to be a very challenging year for ESPN given the new NFL contract),” Greenfield wrote.

Still, Greenfield said Disney was up 17% this year, limiting further upside potential and one factor keeping him from affixing a “buy” rating.