Underperforming Disney

Investing: The long-term success of the venerable company masks weaknesses of the stock over the past five years.

December 25, 2003|By Richard Verrier and Sallie Hofmeister | Richard Verrier and Sallie Hofmeister,LOS ANGELES TIMES

When top Hollywood lobbyist Jack Valenti took the stage at a recent awards banquet, he lavished praise on the man of the hour - Michael Eisner - and his 19 years at the helm of Walt Disney Co.

To make his point, Valenti told the crowd that an investor who bought $10,000 of Disney stock when Eisner took the helm in 1984 would be sitting on more than $220,000 today.

To be sure, Disney's return to shareholders over the past 20 years has been spectacular, far outpacing the average blue-chip stock.

The trouble is, few investors hold on to their shares for that long. And though the long-term return has been stellar, it masks the much weaker performance of the stock over the past five years, notwithstanding a rally over the past 16 months that has encouraged many Disney investors.

That's the argument two former board members are taking to Wall Street in a campaign to unseat Eisner. Roy E. Disney, the second-largest individual shareholder in Disney and the nephew of the company's co-founder, quit the board two weeks ago. He was followed by his ally and fellow board member Stanley Gold.

In their resignations, both men called attention to the company's slide in profit and its once-golden stock price. In an interview, Roy Disney quipped that shareholders would have been better off putting their money in a savings account over the past seven years.

Over the past decade, Disney's return to shareholders, including dividends, has been less than half that of the average blue-chip stock. Investors who jumped in five years ago have fared even worse. The return to investors fell 28 percent during that period, far steeper than the 3 percent slide for the Standard & Poor's 500 index.

During the period, Viacom Inc.'s return to shareholders rose 20 percent, and News Corp.'s owners saw a 27 percent gain. Two other high-profile media giants - Time Warner Inc. and Vivendi Universal - have sad returns, but that's little consolation to Disney investors who had grown accustomed to years of double-digit growth.

"It has underperformed," said Jessica Reif Cohen, a senior media analyst at Merrill Lynch, which has a neutral rating on the Disney stock. "They've had problems in many divisions."

Not surprisingly, attitudes toward Disney stock vary depending on when an investor bought it.

"If you bought Disney at the top and you look at today's price, you're not happy with its performance," said Jeffrey Logsdon, a media analyst with Harris Nesbitt Gerard. "This stock has been much more of a trading vehicle in the last five years than it has been a buy-and-hold stock."

But Logsdon and other analysts say they are nevertheless encouraged by the company's improved finances - and share price. Disney shares have risen more than 60 percent since August last year, when the stock fell to an eight-year low in the wake of a dismal earnings forecast and shakiness in the company's credit ratings. In fact, as the company has noted, Disney shares are up 40 percent this year, nearly double the gains of the Dow and the S&P 500.

That's the principal reason investors have reacted coolly to the boardroom resignations two weeks ago.

After falling 6 percent in the first week after the resignations, Disney shares have steadily climbed back.

"At the end of the day what's relevant is the forward outlook," said Larry Haverty, money manager with State Street Research & Management Co., which is a Disney investor. "This year is going to be great."

Disney, whose film studio set an industry record this year with more than $3 billion in worldwide box-office receipts, has been promoting the turnaround story to Wall Street.

At a Dec. 10 investor conference, Disney Chief Financial Officer Tom Staggs reaffirmed a forecast that Disney would post at least a 30 percent gain in earnings per share next year, in 2004, up from 65 cents this year. He noted improvements at ABC, strong DVD sales and a gradual recovery in theme park business. He also said that attendance at Disney's U.S. theme parks was up 11 percent over last year.

"Our company is strong and getting stronger, and the general economy is improving as well," Staggs said.

Certainly, part of the stock downturn over the past five years has been because of recession and geopolitical events beyond Disney's control. Among media companies, Disney is the most susceptible to economic swings because of its heavy reliance on tourism and television advertising - sectors that have been hit hard by recession and the substantial falloff in travel since the Sept. 11, 2001, terrorist attacks.

But the stock decline also has mirrored investor concerns about long-term problems within the company, analysts say.

With the exception of a strong rally in 2000 and the more recent upturn, Disney's stock price began its downward spiral in 1998, when it was trading at more than $40 a share.

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