Disney's Best-Laid Plans Have Gone Awry

If you went to Nickelodeon's Web site on Monday, this is what you would have found just below the promo for Rugrats trading cards: Suggestions for how to help "after the tragic events in NY, D.C. and PA"; expert advice on talking with one's parents about the subject; and message boards for sharing thoughts about "the recent sad events."

On the other hand, here's the most troubling thing you'll find on the Disney Channel's Web site: the preview for an original movie in which three teenage heartthrobs -- Andy, Joey and Matt Lawrence -- get stranded on a desert island. More like Gilligan's Island than Lord of the Flies or even Cast Away.

I'm not saying that you should buy or sell Disney or Viacom based on the coverage of current events for an audience of children. But I think the contrast between the two Web sites points out a fundamental issue facing Disney: You can try to banish the nightmares from the Magic Kingdom, but you can't banish them from the minds of your potential customers.

Consider some factoids surrounding the company in a recent report from First Union Securities: About one-third of Disney's operating income comes from its theme parks. About two-thirds of that fraction comes from Disney World. And about two-thirds of visitors to Disney World come from out of state. Presumably most of them fly in.

Now consider a family planning a vacation: Try to gauge how willing people will be in the near future to get on a plane with a bunch of strangers, then spend a few days walking around in crowds of strangers. Will they feel like they're in one of the happiest places on earth?

Sure, we'll get back to normal someday. But I think it will be later, rather than sooner. Unlike past travel scares and good-times dampers, this one features a threat that's local, diffuse and one that may still be at large.

So then the question is whether or not the economic repercussions already felt and yet to be felt by Disney are already factored into the stock price. After closing at $17.90 on Monday, the stock is down 24% from its last pre-disaster price of $23.58, and about 40% off the $30 marker it's been hanging out near all year. Well, as First Union analyst Scott Davis points out, theme park attendance was down 15% in 1991 at the time of combat in the Persian Gulf; this time around, however, a drop-off in attendance looks optimistic. (Note: First Union, or a predecessor, has been an underwriter in the past for Disney; Davis cut his rating on the stock from a strong buy to a buy last week.)

Of course, theme parks aren't the whole story, but the rest of the story isn't much to write home about. Roughly 25% of operating income comes from broadcasting; given the current state of the advertising market, as well as expectations of declining ratings, that money is at risk, too. Consumer products? Also at risk because of weakened spending by consumers. Sure, Disney may be trading at a large discount to next year's numbers, but next year's numbers don't look nearly as sure as they did a few weeks ago.