Disney's Drop

May 29 1998 3:30 AM

Disney's Drop

The recent fall in its stock price says less about the company's prospects than about bull market jitters.

In the 1970s and early 1980s, Marxist thinkers were fond of using the phrase "late capitalism" to describe the American economy. With its intimations of the system's decadence and inevitable disappearance, the label sounded both descriptive--these were the days of stagflation, skyrocketing interest rates, and high unemployment--and inspiring. At least if you were Marxist.

You don't hear much about "late capitalism" these days, except insofar as it has morphed, oddly, into the techno-utopianism of New Economy advocates. But what we should start hearing about more and more is our own "late bull market," which seems somehow simultaneously frothy and exhausted. There's no better sign of this than the occasional fits of anxiety that have begun to grip investors who for four years have dismissed talk of overvaluation as irrelevant. As a case in point, consider the recent travails of Disney.

To all outward appearances, Disney remains among the strongest companies on the planet. It reported earnings about a month ago that were typically impressive, with earnings up sharply and news of a three-for-one stock split. The company's new Animal Kingdom park at Disney World opened this month to phenomenal business, and advance buzz on the latest animated Disney film, Mulan, has been very good. Mystery writer Carl Hiaasen did come out with a short book blasting Disney for, well, Disneyfying the world, but if a month goes by without an article or book on that subject, Michael Eisner knows he's doing something wrong. And the company has even got credit for an Oscar-winning film since its subsidiary Miramax released Good Will Hunting.

There were a few question marks in the company's results in the last quarter, arising mainly from the fact that Disney's sales grew hardly at all. But for the first two weeks after the earnings report came out, all the good news drove the company's stock to a new all-time high. Disney, after all, is everything a modern company is supposed to be: media giant, high-tech pioneer, owner of an immensely powerful brand, and a genius at outsourcing. What could go wrong?

Well, the interesting thing is that nothing has gone wrong, and yet in the course of two weeks Disney's stock fell 13 percent, a fairly hefty tumble for a company with a market cap of $79 billion. What happened testifies partly to the continued power of analysts on Wall Street but also to the fact that at these heights, it's very easy to become suddenly--and often justifiably--afraid. Like Wile E. Coyote, investors are able to skate across the air until they look down, at which point the fall is often fast and hard.

That analogy is inexact, since investors have been more than willing to give many companies the benefit of the doubt, but those companies tend to be either Internet stocks, cancer-drug companies, or merger candidates. The punishment Disney's stock received, on the other hand, shows that when the Street changes its mind, even blue chips are not immune.

In essence, what happened was that a few brokerage houses downgraded Disney's stock from "buy" to "accumulate" or to "hold" or to "sell immediately." (Actually, there is no "sell immediately" recommendation, though common wisdom on the Street is that you should do so if bodies begin falling past your windows.) Raising concerns about Disney's broadcasting units, analysts reduced their earnings estimates while also suggesting that at these prices, Disney's stock might be overvalued. Considering that we live in a time when stock-market gurus produce brand new measures of valuation on the spot--"See, you should buy this, because although the company has no earnings, it's trading at just 80 times the cost of the phone calls its employees make in any one month"--the suggestion that a company might actually be overvalued was enough to send investors streaming to the doors.

Since the concerns the analysts raised were not new, you might see this as evidence that investors are now in the same fragile frame of mind as little kids who have stayed up way past their bedtimes. But these concerns were also real. ABC and ESPN--which Disney owns--together paid an incredible $9.2 billion to the NFL for the exclusive rights to Monday and Sunday Night Football, and they may not have the ratings to justify that. ABC is suffering from a declining revenue base, mainly because its prime-time ratings are beyond dismal. True, ESPN is one of the most profitable TV networks and in recent months has started pressuring cable systems to increase the fees they pay for the right to carry it. Still, recouping $600 million annually--the cost of the NFL contract--may be more than even it can pull off.

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A BC is certainly doing its best to put a smiling face on its recent woes. It's been running full-page ads in the Wall Street Journal saying that ABC offers "no pandering" and "upscale momentum." While pandering is bad, I guess, it's hard to resist the thought that describing yourself as "upscale" means that you're not. ABC's "What a difference a day makes" ad, meanwhile, argues that ABC is the top network among the coveted 18-49 crowd, if you leave out Thursday night. This is sort of like saying the Indiana Pacers are the best team in basketball, if you leave out Michael Jordan and Scottie Pippen.

Disney CEO Eisner, who's actually underrated as a pop-culture maven (he was responsible for Happy Days and Welcome Back, Kotter), insists that ABC's downturn is cyclical and that it will soon return to life. But it's interesting to remember that Eisner was actually hesitant to buy a TV network and that it was Jeffrey Katzenberg who pushed hard for such an acquisition, though Disney only bought Cap Cities/ABC after Katzenberg had left. With Disney's brand name perhaps stronger than ever--its theme parks, movie studios, and merchandising machine booming--the fact that the part of the company unconnected from that brand is struggling must make Eisner wonder whether this was an investment that needed to be made.

Ultimately, what's most important about Disney's struggle to turn ABC around is how impressive it makes the company's management of its own franchise look. After 15 years of almost uninterrupted superlative performance--which not even the Katzenberg and Ovitz contretemps could seriously slow down--it's almost impossible to remember how close Disney was to being dismantled in the early 1980s. The brand that we now think of as irresistible seemed tired and used up, and this now seamlessly efficient company lacked even a formal business model before 1983. A lot of what has happened at Disney--better advertising, smarter merchandising, revitalizing the animation department--looks obvious in retrospect. But it was only Eisner's recognition that a brand has to be updated and nurtured if it's to flourish that made those decisions so obvious.

ABC's problems, one suspects, will be much harder to solve, if only because they have much to do with network television as a whole and not just ABC in particular. But Disney's long-term future seems about as guaranteed as that of Coke or General Electric. Investors' recent flight from quality, as you might call it, was not completely irrational. But it tells us more about this edgy and anxious market than it does about Disney. In a market where tomorrow seems like the long term, the fact that 10 years from now the mouse will still be roaring somehow just doesn't really matter.

James Surowiecki writes for the Motley Fool. He can be e-mailed at surowiecki@aol.com.