Disney: Six Reasons Boring is Good in Bad Times

Walt Disney holds a winning hand in a challenging economy with its predictable franchises and mostly stable revenues. The house that Mickey built represents the best case yet for why boring is good in tough times.

There are six good reasons to think Disney will emerge from the recession more unscathed than its media peers, despite its dependence on consumer and advertiser spending. Disney is first and foremost a cable network company with more than 18 percent of its revenues and nearly three-quarters of its operating profit anchored in economically resistant affiliate fees for the likes of ESPN and the The Disney Channel.

Bernstein analyst Michael Nathanson, who has upgraded Disney to "outperform" ahead of quarterly earnings, expects the company to realize generate $6.8 billion in operating income in fiscal 2010. A worst case scenario calling for a 12.7 percent decline would still put Disney's annual profit at $6 billion because of these stabilizing factors:

1. It's a cable network company. The cable networks have become a more stabling growth force than Disney's film studio or parks. About 70 percent of its cable network revenues come from reoccurring affiliate fees paid by cable and satellite operators, growing by $700 million annually. (See my recent post on the sale of the Travel Channel).
2. Its cable networks are niche anchors. ESPN -- in all of its iterations -- is what Disney management calls an impregnable "moat" of rich, cross-company, multimedia brand content. Disney is working with NBC Universal and Hearst to streamline costs and revamp their ownership of A&E, Lifetime and The History Channel. The Disney Channel's aging content and waning teen appeal could be a trouble spot.
3. Its future film slate includes Toy Story 3 and Cars 2. No one can produce lucrative film sequels like Disney's Pixar Animation. Its DVD sales are better positioned than most because of evergreen children's and family titles. About 80 percent of the $1.1 billion in costs Disney has taken out of its film studio have gone straight to its bottom line. There is speculation Disney may close its specialty Miramax film division.
4. Consumer products and games should actually improve. Affinity for its marketable animated characters should drive Disney's consumer product sales even in a recession. Disney's video game division is poised for a turnaround. Heavy investment has fueled 24 percent annual revenue growth although video game losses have averaged $300 million annually.
5. ESPN advertising and Disney theme parks will snap more quickly. An economic recovery will see Disney's franchises rebound quicker than most as they remain top picks for consumers and advertisers.
6. Disney management is pragmatic and independent. It also doesn't hurt that the team headed by CEO Bob Iger is compensated based on quantifiable factors such as balance sheet gains. Iger and other yop executives, who have been maintaining a low profile this year, will take measured risks to build shareholder value, true to the company founder's magic skill of engaging young-at-heart consumers.

Pali Capital's Rich Greenfield sees trouble signs in Disney's 40 percent room discounts and free dining as part of its already aggressive theme park promotions ahead of the company's annual admission price increase.

Greenfield has a "sell" on Disney on the belief that without a firm recovery, theme park revenues will continue falling against limited options for reducing costs "given the importance of maintaining the guest experience."