Disney: Those Big Ears Are Drooping

Disney is arguably the preeminent media company in the world. Revenues in the current fiscal year ending September 2009 are projected at $39 billion. Over the past five years, the company has effectively managed its asset base by culling the worst old-school media assets, such as radio, and investing in strengths like animation and cable networks.

However, the stock presently more than reflects the premium, particularly given rising cyclical challenges and secular issues it has thus far minimized. I purchased Disney originally on April 29, 2005, at $25.66 and sold it on May 30, 2008, at $33.79 when I grew concerned that earnings momentum was about to slow. My current forecast is bearish for the short-term, but I do not short so for now -- I plan to remain on the sidelines.

Despite its history in animation and theme parks, the largest business unit and earnings driver is cable networks, which are dominated by ESPN. Cable networks represent roughly 25% of revenues and 50% of operating profits.

Theme parks are the next biggest business at about 30% of revenues and 15% of operating profits. The movie studio is 20% of revenue and profits, and television broadcasting -- primarily ABC and its owned and operated stations -- is 15% or revenue and 10% of profits. Disney also knows that at its core it is a content creator, and the focus on content has led to a series of wins from the studio and cable networks.

The risk now is that the content win streak has come to an end at the same time that cyclical pressures are biting hard at ESPN, ABC and the theme parks. The evidence is there. The 2008 film slate had no breakout hits and a miss in the second "Narnia" film. "High School Musical" and "Hannah Montana" are still spinning profitable projects, but they have now been exploited in all windows and are getting old. Management has admitted that park bookings beyond December are down sharply. The sudden weakness in advertising at ESPN is especially worrisome.

Disney trades at 11 times the current September 2009 consensus EPS estimate. The estimate has been falling rapidly -- as recently as 90 days ago, it was $2.47. The most recent estimate cuts have created a new low estimate of $1.80. The stock is down about 30% this year and has held up far better than the other major media conglomerates including News Corp. (NWS - commentary - Cramer's Take), Time Warner (TWX - commentary - Cramer's Take) and Viacom (VIA - commentary - Cramer's Take).

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At time of publication, Birenberg was long TWX, DWA, NIHD and CETV, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.