Pearl Harbor may turn out to be the blockbuster summer movie this year. That doesn't justify paying a higher price now for shares of Walt Disney Co, the movie's producer, says UBS Warburg LLC analyst Christopher Dixon.
Dixon lowered his recommendation on Disney to "buy" from "strong buy," saying the stock is fairly valued, with the stock a third higher than it was in December, "I'm a happy camper; if you want to go invest in it, fine," Dixon said. "I am not going to go out and be as aggressive as when the stock was trading" lower.
Dixon's call comes a day after Salomon Smith Barney Inc analyst Jill Krutick said Pearl Harbor could add as much as US$0.25 a share to Disney's earnings over the next couple of years. She raised her rating on the stock to "buy" from "outperform."
Shares of Disney, the owner of movie studios, theme parks and ABC Television, have rallied 19 percent in 2001, the sixth-biggest gain in the Dow Jones Industrial Average. Still, they have trailed their peers in the entertainment industry. AOL-Time Warner Inc has climbed 64 percent for the year and Viacom Inc has gained 24 percent.
Concern that consumer spending and advertising will decline if the economy slows further may pressure the stock, Dixon said.
Profits won't improve until the first half of Disney's next fiscal year, which starts in October, he said.
Shares of the Burbank, California, company rose US$0.22 to US$34.50.
While Pearl Harbor, the World War II movie starring Ben Affleck, has attracted the attention lately, the next catalyst for Disney shares is likely to come from sales of digital video disks, said Dixon, 53, who worked as a producer and director for 18 years before moving to Wall Street in 1986.
"Disney is much more than just any one movie," Dixon said on television. "We think the real story for the Disney film division will be the DVD market. You're not going to see that until ... the holiday season."
The stock also isn't cheap, Dixon said. The analyst lowered his recommendation because the stock is near his previous US$35 price forecast. The shares typically sell for a price-earnings multiple that's 70 percent higher than the multiple of the Standard & Poor's 500 Index, he said.
The index sells for 25 times this year's expected profit, according to First Call/Thomson Financial. That means Disney should sell for 42 times this year's expected profit, which is about where the stock is now.
Looking ahead, the S&P 500 trades at 23 times 2002 earnings, so Disney should sell for 39 times its expected profit for next year, said Dixon, who predicts the company will gain US$1 in fiscal 2002.
The result is his new price forecast of US$40 to US$42 in the next 12 months. That would translate into a gain of as much as 22 percent.
Dixon sees the DVD market as a growing source of revenue for movie studios. He said the release of the Disney animated classic Snow White. could drive growth in the filmed entertainment division.
"The big story for the movie industry is not just the summer movie box office," Dixon said on BTV. "It is the DVDs. That is where all the cash flow comes from." Shares of Disney jumped 5.2 percent yesterday after Salomon's Krutick said the stock could receive a "psychological impact" if Pearl Harbor or Monsters, Inc are hits at the box office.
Krutick, ranked by money managers as the No. 1 leisure analyst in Institutional Investor magazine's 2000 survey, also said the advertising market could firm if the economy strengthens next year.
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