Since the start of 1999, The Mouse has risen more than 25%, adding close to $20 billion to its market cap in a matter of days. Disney is now closing in on its all-time high of 42 19/24, set in May 1998. It was trading at 37 7/16, up 2 3/16 today.
The surge comes as Disney unveils its
, an Internet portal designed to compete with sites like
. The service, at www.go.com, is a joint venture between Disney and
, a Net company in which Disney has a 43% stake. Go, which emphasizes content from Disney-owned sites like
, has gotten generally good reviews for its comprehensiveness and ease of use, although to the untrained eye it doesn't look all that different from other portals. (ABCnews.com has an editorial partnership with
. Also, some of
technology is hosted by Starwave, which is owned by Infoseek.)
Even so, Go's launch has apparently distracted Disney investors from the mundane concerns that left the Mouse's stock badly lagging its competitors last year. Disney's earnings, which fell in 1998, are expected to get no better this year, and the company's
television network faces maybe the toughest operating environment in its history. Disney isn't exactly cheap these days, either: It's trading at more than 40 times trailing earnings, not peanuts given the company's recent nonexistent growth.
For once, though, the Internet hype may be justified. Go again reveals the gap between Disney and its major competitors. Other big media companies like
talk vaguely about the Internet's potential, while lurching from one strategy to another. Meanwhile, Disney has actually built a competitive portal mixing its proprietary content with easy access to the vast troves of information available on the rest of the Net. Given the Mouse's family-friendly reputation and marketing power, Go appears likely to become an instant force on the Internet.
As a result, sell-side analysts are rushing to raise their ratings on Disney, despite the company's short-term problems. (It probably doesn't hurt that Disney's movie division, which had an expensive 1998, has had a string of hits in the last two months. Because of the time lag between a hit movie and when a studio recognizes revenue, the movies could give the company a small but noticeable boost through the year's first half, just when it most needs the help.)
Some of the upgrades sound more than a little tortured:
said in a research report released today that it was upping Disney from a market perform rating to a market outperform because "we believe Disney's near-term stock price performance will exceed that which is justified by traditional fundamentals." Goldman didn't return a call for comment on its report. It has participated in debt underwriting for Disney.
But other analysts are less equivocal. "As people start to recognize that the Internet is de facto mass media, the large media companies are superbly positioned,"
analyst Christopher Dixon says. He argues that "old media" companies like Disney and Time Warner have an edge over their Internet-only counterparts like Yahoo! because they produce original content instead of simply buying and republishing information and entertainment from other sources.
Dixon estimates that the Net may eventually give Disney's cash flow, now close to $5 billion per year, an incremental boost of 3% to 5% annually over a period of several years. Those gains would help the company boost its long-term growth rate to better than 15% per year, Dixon says. On Monday, he raised his price target for Disney stock to 38 from 33, and with the stock rising, he now says his target is "38 to 40." Paine Webber has no underwriting relationship with Disney.
Maybe the most surprising ratings swing came from
Salomon Smith Barney
analyst Jill Krutick. Only last week, Krutick released a report headlined "DIS: 1Q99 Outlook Bleak -- Theme Parks the Only Bright Spot." Citing "lagging ABC ratings" and "disappointing film results," she cut her cash-flow estimate for the company by $120 million, to $1 billion, and lowered her bottom-line earnings per share estimate for the fiscal first quarter ended in December to 22 cents a share from 25 cents a share. And she predicted that Disney might have to struggle merely to achieve flat earnings for its full 1999 fiscal year, which ends Sept. 30. Krutick reiterated her neutral rating, generally the lowest ranking an analyst will slap on a company as large as Disney, and stuck with her price target of 33. Salomon has participated in Disney underwriting projects.
This morning, though, Krutick was whistling a much happier tune. "We have rising confidence in Disney's long-term outlook, especially as it relates to the company's Internet initiatives and other value drivers. While we still project flat earnings in FY99, the results will likely be more back end loaded as new investment spending ebbs. Earnings appear to have bottomed and should accelerate into 2000 and 2001." Her new rating: a strong buy. Her new price target: 42.
Of course, Krutick also lowered her fiscal second quarter estimate to 15 cents a share from 21 cents, although she kept her annual estimate intact at 90 cents. She didn't return a call for comment on her switcheroo.