From Yahoo's Online Investor:
Stock of the Day
May 25, 1999
Disney: GOing for Broke
Walt Disney Co. (NYSE:DIS - news) has struggled for the past year and its problems run deep, so a sudden turnaround does not appear imminent. But there are some worthwhile developments going on now that lay the groundwork for future growth. For starters, Disney is ramping up its push of the GO Network with a big ad campaign starting this week.
Disney owns 43% of Infoseek (Nasdaq:SEEK - news) , and the two companies jointly launched the GO Network earlier this year. GO has already moved to the number five spot among portal sites on the web. Disney has used its broadcasting properties, ABC Television and ESPN, to quickly establish the GO brand. This week GO Network begins a nine-week ad campaign that will run during ABC's most popular prime-time programming.
The promotional push comes on the heels of a report that four out of the top five portals saw a decline in April traffic versus March. This news underscored a revelation by some investors that the explosive growth of Internet traffic cannot continue in a straight line up to the heavens. Net stocks have really taken a hit lately, so Disney could being showing up at the web party just as the punchbowl runs dry.
For investors who like to look at out-of-favor stocks, Disney certainly qualifies. The stock peaked at $42.36 a year ago, fell as low as $22.50 before settling in around $30 of late.
Walt Disney is hurting on most business fronts, including its theme park and resort operations which have suffered from the Asian/global economic crisis. While a U.S. recession is not threatening, there is some concern that rising interest rates could bring an end to the current eight-year expansion. Disney's theme park business is highly dependent on a vibrant economy as evidenced during the 1991 recession when revenues slipped and profits plunged.
Another cyclically sensitive area for Disney is its TV network business. The media giant's ABC television network has suffered from declining ratings as cable continues to eat into market share, and the threat of slower economic growth compounds the problem because ad spending is closely tied to the economic cycle.
Disney's revenues from consumer products and merchandise licensing took a big hit in Asia last year. Finally, Disney's filmed entertainment business produced disappointing results at the box office last summer so now it's cut spending in this area to stem the bleeding.
Revenue growth has slowed to the low single digits and earnings per share have declined in each of the past four quarters. The mouse is stunned and staggering, but it's still on its feet. Disney is putting substantial resources into growing the Internet business. The company's Disney, ESPN and ABCNews sites have already established a solid presence, and the GO Network is off to a good start.
Since Disney is such a premier global brand bargain hunters will always be circling, but it needs a catalyst to get things moving in the right direction again. The Internet business is so young and such a small part of Disney's revenues that, even if successful, could take years before it kicks in as an engine of growth. A turnaround in ratings at ABC or a meaningful improvement in the global economic scene would certainly help, but the risk of a domestic slowdown also exists. Until Disney can produce a major catalyst, the mouse is in the dog house.
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