NEW YORK (CNN/Money) -
Hockey legend Wayne Gretzky referred to the New Jersey Devils circa the early 1980's as a "Mickey Mouse operation." It wasn't a compliment.
Well, to paraphrase the Great One, The Walt Disney Company circa 2004 is also a "Mickey Mouse operation."
The ABC television network remains stuck in a ratings nightmare. The movie studio suffered a hat trick (to continue our hockey theme) of theatrical flops this spring: "Hidalgo", "The Alamo" and "Home on the Range".
Pixar, the powerhouse animation studio behind hits "Finding Nemo" and both "Toy Story" films, in January decided to not extend its distribution agreement with Disney. A shareholder revolt forced Disney CEO Michael Eisner to abdicate his role as chairman in March.
And oh yeah, cable giant Comcast launched an unsolicited takeover bid for Disney (DIS: Research, Estimates) in February, only to walk away from the deal late last month.
Scarier than the Haunted Mansion
Even though analysts expect Disney to report Wednesday that fiscal second-quarter profits should be almost double the earnings from a year ago, Wall Street's longer-term outlook for Disney is still more Brother Bear than Ferdinand the Bull.
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"Don't confuse a recovery with growth," said Richard Greenfield, an analyst with Fulcrum Global Partners. "The question for investors is not how does Disney fare for this quarter. The question is next year -- and the growth rate is not sustainable."
Analysts expect overall earnings for Disney to soar 48 percent in fiscal 2004, which ends in September, but that profits will increase by just 12 percent in fiscal 2005. Sales are expected to increase by only 4.5 percent in fiscal 2005.
All this news has hurt the stock.
Shares were trading at about $24 before Comcast made its offer and the stock rose as high as $28.41 the day after the takeover bid was announced. That raised hopes that shares could finally reach $30, the mystical number that they haven't traded above since June 2001.
But the stock plummeted back to about $23. It was lifted more than 4 percent Tuesday after an upgrade by an analyst at UBS but $30 still seems like NeverNeverLand for Disney longs.
It's gotten so bleak, rumor has it that Scrooge McDuck is thinking of shorting Disney stock to increase his fortune. (Thank you very much. I'm here all week.)
Trouble in Tomorrowland
There are some positives at Disney. But even the company's strengths are showing some chinks in the armor.
The theme parks division, for example, is clicking, thanks to a rejuvenated economy.
That's important since theme parks accounted for 27 percent of the company's overall operating income and 36 percent of total sales in its fiscal first quarter. But rising rates, as well as renewed terrorism fears, could hurt that segment.
And ESPN, arguably the crown jewel of Disney's programming empire, has lost some luster. Cable companies Cox and Charter negotiated new deals earlier this year in which they will pay lower fee increases to carry ESPN than they had in the past.
"ESPN is still a valuable property," said David Joyce, an analyst with Guzman & Co. "But it can't grow the way it used to."
Disney does not break down sales and profits figures for just ESPN but the company's cable network unit, which also includes the Disney Channel and ABC Family, accounted for 16 percent of operating income and 18 percent of sales in the first quarter.
There are other reasons to worry as well. Greenfield said Disney will face tough comparisons in its movie division this summer since it had two huge hits last year with "Finding Nemo" and "Pirates of the Caribbean: The Curse of the Black Pearl."
The studio entertainment business accounted for more than 35 percent of Disney's sales and operating income in the first quarter.
And Joyce thinks that a real turnaround at ABC is critical. Disney recently replaced the top brass at ABC and later this month, the new team will pitch its fall lineup of shows to advertisers.
"Investors are still concerned about ABC," Joyce said. "Hopefully some new life has been breathed into it with the management shakeup." But that's a big if. The network desperately needs a hit.
Sure, it might not get much worse for Disney. And those formerly sad sack New Jersey Devils did wind up having the last laugh on Mr. Gretzky, after all. They have won three Stanley Cups since 1995.
Still, I'm not so sure Disney is going to wind up as a champion stock anytime soon.
Analysts quoted in this piece do not own shares of Disney and their firms have no investment banking relationships with the company.
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