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Disney shares, even at a six-year low, get a new 'sell' rating

March 9, 2009 | 10:18 pm

Shareholders of Walt Disney Co. have lost 31% of their investment this year, on paper.

Now, analyst Richard Greenfield at Pali Research pulls the plug.

Greenfield downgraded Disney on Monday to "sell" from "neutral," after slashing his earnings estimates for the firm. The stock slid 24 cents to $15.59, a new six-year low.

Anticipating that clients would be asking, "Why now?" -- as opposed, say, to a few months ago, when the stock was $7 higher -- Greenfield wrote in a report: "While Disney has one of the best secular asset mixes within the media sector, essentially everything is going wrong at the same time, with the length of pain likely to extend further than we had previously expected."

He sees the stock heading for $12.50.

Mickeytokyo His change of heart on Disney says a lot about the grim mood on Wall Street: Faith in corporate earnings estimates for 2009 and 2010 continues to ebb as analysts push hopes for an economic recovery further into the future.

Greenfield said it was "increasingly hard to imagine the world economic landscape improving enough to drive Disney’s fiscal 2010 earnings."

He hacked his estimate of the company’s 2009 results to $1.63 a share from $1.82. In 2010, he now expects the company to earn $1.45 a share instead of $2.04.

He is far gloomier than his peer analysts. The median estimate of 30 analysts who track the company is for earnings of $1.75 a share this year and $1.93 next year.

Greenfield sees Disney’s operating income sliding this year across its major businesses of theme parks, studio entertainment and cable networks (ESPN, Lifetime, etc.). And things will get much worse for the U.S. parks, in particular, in fiscal 2010, he figures, in part because he sees foreign tourists staying home given the surprisingly strong dollar. . . .

He estimates that operating income for the parks will dive to $583 million in fiscal 2010 from $1.16 billion this year.

Abctower Despite some expected improvement in the cable unit’s operating income in 2010 from this year, it won’t be nearly enough to make up for the shortfall in the parks division and an even deeper plunge in the ABC broadcasting business, Greenfield estimates.

Finally, with free cash flow slumping, he doubts Disney will be able to spend much on stock buybacks, "which had been a key tool used by management to drive earnings over the past few years."

At Monday’s stock price, Disney’s price-to-earnings ratio based on Greenfield’s 2010 estimate is less than 11 -- seemingly cheap.

But he thinks investors will value the company at an even lower P/E because its peers already are so much cheaper. Time Warner Inc.’s P/E, for example, is just 7.5 based on analysts’ median earnings estimate for 2010. Viacom Inc.’s 2010 P/E is 6.4.

These are premier American media assets, but that obviously doesn't mean much on Wall Street at the moment.

-- Tom Petruno

Top photo: Mickey greeting visitors at Tokyo Disneyland earlier this year. Credit: Katsumi Kasahara / Associated Press

Bottom photo: The ABC building in Burbank. Credit: RMA Photography Inc.