Wall Street sees Disney beating doldrums, for now

By Gina Keating

LOS ANGELES (Reuters) - Investors say it's a matter of time until deepening U.S. economic doldrums steal into the Magic Kingdom, but they expect Walt Disney Co to have mostly escaped their effects for the first half of calendar 2008.

As Disney reports its quarterly results this week, investors and analysts already are focused on the year's back half for signs that the company's astonishing profitability during the year-long economic downturn is faltering.

Wall Street expects low-single-digit rises in profit and revenue for Disney's fiscal third quarter ended in June.

Analysts, on average, expect Disney to post net earnings of 60 cents per share and revenue of $9.14 billion, only slightly ahead of last year's quarterly EPS of 58 cents and revenue of $9.05 billion, according to Reuters Estimates.

Analysts said the true impact of souring consumer sentiment and falling disposable income on Disney may be masked by a number of factors that may narrow profits and depress revenue.

The issues include a revenue deferral at ESPN, tough comparisons for the theme parks and movie businesses, and possibly higher costs at the consumer products division.

Disney Studios is expected to drag on overall company results, mainly because "The Chronicles of Narnia: Prince Caspian" failed to measure up to last year's blockbuster "Pirates of the Caribbean" sequel.

The parks business, considered a consumer bellwether, is expected to post growth but will be compared against a 2007 quarter that included an Easter holiday and record attendance.

The parks have managed "stellar" results for two years, and the effects of high gasoline prices and a cut in airline capacity to Disney World resort in Florida may be unclear for a quarter or two, Caris & Co analyst David Miller said.

While global retail sales of Disney Consumer Products grew by 10 percent in fiscal 2008, profits may be squeezed by video game development costs and charges from retail stores Disney took over in May from Children's Place Retail Stores Inc, Standard & Poors Equity Research analyst Tuna Amobi said.

Sports networks ESPN enjoyed strong ratings in the quarter from the National Basketball Association finals, Sunday baseball and racing's Triple Crown, but robust ad sales may be dampened by $120 million in revenue deferred to the fourth quarter, Amobi said.

'BODY LANGUAGE'

RBC Capital Markets analyst David Bank expects the stock price to follow the tone set by Disney executives on the post-earnings conference call on Wednesday afternoon.

"For the quarter, I'm pretty confident," Bank said. "It's really what comes out of that call that's going to be interesting, the body language."

A positive word from Chief Financial Officer Tom Staggs on Wednesday about advance hotel bookings and advertising sales could go far to re-energize shares that have dropped 11 percent from a quarterly high of $35, analysts said.

"The parks are really going to set the tone for the rest of the company. If the company reports the trends holding up in the parks, I think you could see the stock get a lift," said Amobi, who has a "strong buy" rating on Disney.

"The underlying trend of the parks is still healthy ... but the economic slowdown could potentially become more of a factor in the back half of the year," Amobi said.

Analysts also are listening for weakness at ESPN, a main driver of its media networks business.

"If the advertising tone at ESPN changes dramatically, that would be something that we would be looking for," Bank said. "That would be a big negative."

Disney's ABC broadcast networks also are expected to show a healthy increase in spot or "scatter" ad rates despite lower ratings, due to tight inventory in the quarter.

"To our knowledge, scatter in the quarter was generally selling at a 10 percent premium to upfront because ABC was top rated," said Miller, who rates Disney "above average."

The stock has largely escaped a punishing of U.S. media stocks with a forward price-to-earnings ratio of 12.4. Rival CBS Corp has dropped to 8.6 times estimated 2009 earnings, News Corp to 10.6 and Viacom Inc to 10.9. Only Time Warner Inc has bested Disney, with a multiple of 12.9.

(Reporting by Gina Keating, editing by Gerald E. McCormick)