Last Updated: May 6, 2008: 7:41 PM EDT
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No such thing as recession in Disneyland?

Strong performance by Disney's theme parks helped boost the entertainment giant's earnings.

By John Simons, writer

(Fortune) -- Summer's almost here. So, when it comes to looking at the strength of the Walt Disney Company, it's natural to zero in on the media conglomerate's domestic theme parks and their potential to lure vacationers this year. Some of the company's closest observers insist the specter of looming recession, consumer confidence at a 16-year low, and increasing gas prices all spell doom for Disney's magic kingdom.

But Wall Street's fixation on Disney's (DIS, Fortune 500) theme parks and their possible exposure to economic erosion could be the key to healthy gains for investors, say some analysts. "We believe the market's singular focus on Disney's domestic parks could create an attractive entry opportunity for longer-term investors," wrote Bernstein Research analyst, Michael Nathanson in a recent note to clients. Nathanson rates Disney a "market-perform" with a year-end price target of $37, some 12% above Tuesdays closing price of $33.73

The strength of Disney's resorts was in evidence Tuesday when the company reported earnings for its fiscal second quarter. The company's theme parks posted a 33% increase in operating income over the same period last year. That helped Disney to grow quarterly net income by 22% to $1.13 billion, or 58 cents per share, compared to 44 cents per share for the same period a year ago. The numbers beat analyst expectations of 51 cents.

Perhaps investors are thinking about the old Disney when they fret over its summer theme park draw. It's true that the company was hit hard during the first Gulf War in 1991 as visitors dropped to a trickle. But in 1991, theme parks accounted for half of Disney's operating income. Today, with robust income growth in cable networks, movie studios and consumer products, the portion of Disney's operating income derived from theme parks is just 20 percent.

Even as theme park revenue matters less to Disney than it once did, the company has instituted a number of reforms in recent years that will help it eek out better returns at the resorts this summer. In early April, Lehman Brothers analyst Anthony DiClemente built a strong case for Disney's theme parks. "We view Disney's parks as more insulated than in prior recessions," he wrote in a report to investors entitled "Riding Through Recessionland." His thesis? First off, a weaker dollar helps international visitation. In recent years, Disney has instituted better cost controls at theme parks to support healthier margins. Disney now has the ability to, for instance, better manipulate park hours, adjust the number of room nights available in hotels, the number of rides and other attractions in operation, and the number of temporary and seasonal workers. Finally, Diclemente points out, Disney's theme parks segment is more diversified than ever, as it includes Disney Cruise Lines, Disney Vacation Club, and international parks in Tokyo, Paris and Hong Kong.

DiClemente believes summer theme park fears are already priced into Disney's share price. Like Bernstein's Nathanson, he has set a year-end price target of $37.

On a conference call with investors Tuesday, Disney CEO Bob Iger stopped short of forecasting strong momentum at Disney's resorts this summer. He did note, however, that bookings for this summer are higher than those through the end of April last year. Iger also noted another key difference at Disney's theme parks in recent years: During the 1991 downturn a high proportion of hotel rooms at the resorts were "premium priced" lodgings. "Today," Iger said, "Seventy-five percent of our hotel rooms are in the 'value price' category." As a result, he said, "we are much better positioned than in the past, certainly better than back in 1991."

In the past five years, Disney shares are up 77 percent compared to the S&P 500's rise of 51 percent. So far this year, Disney shares are up nearly 3 percent, outperforming both the S&P 500 (which has fallen 4 percent) and the rest of its media conglomerate peers.

On the whole, Disney's ability to weather an economic downturn appears better than many of its peers. The company has a strong combination of positives that bode well for its health in an economic downturn, notes Laura Martin, an analyst with Soleil Securities Corp. In a recent communication with investors, Martin ticked off a list of Disney's main strengths including established global brands, the company's high-quality library of content, and the ABC network's strong ratings.

Boasting hit shows such as "Dancing with the Stars", "Desperate Housewives", "Grey's Anatomy", and "Lost," ABC was able to increase its advertising rates more than other broadcast networks ahead of this year's "upfront" ad-selling season. The company's cable networks - ESPN, The Disney Channel, ABC Family and others - benefited from viewers searching for fresh content during last winter's writer's strike. All of these factors speak to Disney's recession resilience. To top of page

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