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June 12, 2006

Disney Downgraded at Citigroup

On top of the slightly weaker than expected opening for Cars, Disney caught a downgrade from Citigroup which has the shares down about 3% this morning. However, the downgrade had nothing to do with Cars. Rather it was totally predicated on the analyst’s expectation that theme park revenues and operating income would fall well short of consensus in 2007 leading DIS to miss the current 2007 consensus forecast of $1.64 by 11 cents. Citigroup believes that theme park attendance will fall short due to tough comparisons against 2006 growth that was driven by the 50th anniversary marketing. Additionally, waning consumer confidence correlates with lower them park attendance.

Back to Cars, I quickly browsed through analyst commentary and found that most analysts noted the slight shortfall but few felt it would have any significant impact on profits. Merrill Lynch said that at most over the next two years when DIS is projected to earn over $3.00 combined, the shortfall could cost 3-4 cents, just 1% of EPS. Merrill went on to state that at a presentation it hosted in London last week, the head of Disney's consumer product division said that the Cars launch was the strongest for any Pixar film ever with most of the initial inventory fill selling out. This is an important point as the Pixar acquisition must be analyzed relative to its contributions across all of Disney's businesses, not just eh box office for any single film.

DIS shares have fallen almost 10% from last week’s 52-week high at today’s open. I think that more compensates for the slight shortfall of the Cars opening and Citigroup's concerns over theme park growth in 2007. Sentiment on the shares will now be sour for the short-term but as I wrote earlier today I think near-term earnings will remain very strong and Pirates of the Caribbean and June quarter earnings provide catalysts over the summer.

Posted by Steve Birenberg at June 12, 2006 10:21 AM in DIS