Lingering Troubles May Overshadow Disney's Gains
By LAURA M. HOLSON
Published: August 10, 2004
LOS ANGELES, Aug. 9 - When the Walt Disney Company announces its third-quarter results on Tuesday, investors are expected to receive the good news that the company is on track to deliver on its promise of an increase in earnings of more than 40 percent this year.
But summertime optimism could be tempered this fall as Disney faces jockeying over a new board member, a potentially embarrassing trial in a shareholder lawsuit, testy negotiations over its art-house studio and continued questions about its growth prospects.
Disney's chief executive, Michael D. Eisner, who was stripped of his chairman's title at the annual board election in March after an unusual no-confidence vote by shareholders, is sure to come under fire again. Two dissident investors and former board members, Stanley Gold and Roy Disney, the nephew of the company's founder, are expected to propose a slate of directors to replace Mr. Eisner and others.
"Investors want to know what's coming down the road and are things headed in the right direction," said Ann Yerger, deputy director of the Council of Institutional Investors, which advises large institutional investors on corporate governance issues.
Disney has come a long way since its share price hit an eight-year low of $13.77 in August 2002. For the 2004 fiscal year, which ends Sept. 30, many Wall Street analysts expect the company to earn $1.04 a share, well above the 66 cents a share it earned in the previous fiscal year. In addition, the company has said it will recommend that the board increase the dividend, a boon for investors.
Disney's stock price has gained over the last two years - outperforming the Standard & Poor's 500-stock index - closing on Monday at $21.94, down 5 cents, though that is nearly 23 percent off its 52-week high of $28.41.
The steady stream of criticism of Mr. Eisner in the first half of this year, when the company also battled a takeover offer from Comcast, has quieted, too, a shift that analysts chalk up to the company's improving fortunes, investor fatigue and Wall Street's preoccupation with the growth of the economy and the possibility of terrorist attacks.
Disney executives and board members declined to comment or did not return phone calls. But long-term investors and analysts, despite recent encouraging news, are concerned about what will happen in the 2005 fiscal year and beyond.
"Ultimately management's success is all going to hinge on the performance, the quality of Disney's earnings and their sustainability," Ms. Yerger said.
One concern is that Disney has not been able to turn around the ABC network. And there is a perception that Disney's other businesses could grow more slowly than their rivals.
In July, Richard Bilotti, an analyst at Morgan Stanley, lowered his 2005 earnings forecast for the company to $1.15 a share from $1.19, citing weaker DVD sales for movies as a result of the recent poor showings in the film division, including "The Alamo" and "Home on the Range."
He predicted that theme park performance, which has historically been a major driver of revenue, will slow from 2005 to 2009. And he warned that Disney's long-term growth is largely tied to the performance of one division, the cable networks group, which includes the highly profitable ESPN and the Disney Channel.
Questions loom, too, over what will happen with Miramax, the art-house studio that was started by Harvey and Bob Weinstein, as well as Disney's storied animation division. Miramax's co-founders are renegotiating their employment agreements with Disney and a deal could be reached that would allow Harvey Weinstein to become an independent producer while Bob Weinstein would stay at Disney.
In animation, Disney continues to lag behind in the popular computer-generated film genre, trailing peers like DreamWorks Animation, which announced recently that it would sell shares to the public, and Pixar Animation Studios, which will end its highly profitable joint venture with Disney next year.
Disney has two computer-generated movies planned, the direct-to-video release "Twice Upon a Christmas" with Mickey Mouse, which will come out this year, and "Chicken Little," which will be released in theaters next year. Richard Greenfield, an analyst at Fulcrum Global Partners, said investors would be watching how Disney succeeded in animation on its own without Pixar.
Corporate governance issues are likely to continue to pester Disney's board. In October, a shareholder lawsuit is set to go to trial over the $140 million severance package paid to Michael Ovitz, the Hollywood agent Mr. Eisner hired as Disney's president. The trial could dredge up old information that is embarrassing to Mr. Eisner. Already some highly personal letters from Mr. Eisner to Mr. Ovitz have circulated around Hollywood and in the news media.
Disney is also seeking a new independent director, and a group of some of the nation's largest pension plans have been interviewing potential candidates in recent weeks, hoping that Disney will appoint one of them. The group is expected to propose a series of candidates ahead of a board meeting in September.
"At this point we are engaging the board; we are having a dialogue," said Christy Wood, a senior investment officer for global equities at the California Public Employee Retirement System, which called last March for Mr. Eisner's departure. "We are heading down a path of working with them."
But the real drama to be watched is how much noise Mr. Gold and Mr. Disney, who campaigned last year to oust Mr. Eisner, make ahead of Disney's annual meeting in March. The two have yet to announce any nominees to the board, and many on Wall Street are preparing for what could be a long and bitter proxy fight.
Ultimately, Mr. Gold's and Mr. Disney's success, or lack of it, will depend on the success that management has in turning the company around.
"If it is good, the board doesn't have to do anything," Mr. Greenfield said. "If it is not, they do.
By LAURA M. HOLSON
Published: August 10, 2004
LOS ANGELES, Aug. 9 - When the Walt Disney Company announces its third-quarter results on Tuesday, investors are expected to receive the good news that the company is on track to deliver on its promise of an increase in earnings of more than 40 percent this year.
But summertime optimism could be tempered this fall as Disney faces jockeying over a new board member, a potentially embarrassing trial in a shareholder lawsuit, testy negotiations over its art-house studio and continued questions about its growth prospects.
Disney's chief executive, Michael D. Eisner, who was stripped of his chairman's title at the annual board election in March after an unusual no-confidence vote by shareholders, is sure to come under fire again. Two dissident investors and former board members, Stanley Gold and Roy Disney, the nephew of the company's founder, are expected to propose a slate of directors to replace Mr. Eisner and others.
"Investors want to know what's coming down the road and are things headed in the right direction," said Ann Yerger, deputy director of the Council of Institutional Investors, which advises large institutional investors on corporate governance issues.
Disney has come a long way since its share price hit an eight-year low of $13.77 in August 2002. For the 2004 fiscal year, which ends Sept. 30, many Wall Street analysts expect the company to earn $1.04 a share, well above the 66 cents a share it earned in the previous fiscal year. In addition, the company has said it will recommend that the board increase the dividend, a boon for investors.
Disney's stock price has gained over the last two years - outperforming the Standard & Poor's 500-stock index - closing on Monday at $21.94, down 5 cents, though that is nearly 23 percent off its 52-week high of $28.41.
The steady stream of criticism of Mr. Eisner in the first half of this year, when the company also battled a takeover offer from Comcast, has quieted, too, a shift that analysts chalk up to the company's improving fortunes, investor fatigue and Wall Street's preoccupation with the growth of the economy and the possibility of terrorist attacks.
Disney executives and board members declined to comment or did not return phone calls. But long-term investors and analysts, despite recent encouraging news, are concerned about what will happen in the 2005 fiscal year and beyond.
"Ultimately management's success is all going to hinge on the performance, the quality of Disney's earnings and their sustainability," Ms. Yerger said.
One concern is that Disney has not been able to turn around the ABC network. And there is a perception that Disney's other businesses could grow more slowly than their rivals.
In July, Richard Bilotti, an analyst at Morgan Stanley, lowered his 2005 earnings forecast for the company to $1.15 a share from $1.19, citing weaker DVD sales for movies as a result of the recent poor showings in the film division, including "The Alamo" and "Home on the Range."
He predicted that theme park performance, which has historically been a major driver of revenue, will slow from 2005 to 2009. And he warned that Disney's long-term growth is largely tied to the performance of one division, the cable networks group, which includes the highly profitable ESPN and the Disney Channel.
Questions loom, too, over what will happen with Miramax, the art-house studio that was started by Harvey and Bob Weinstein, as well as Disney's storied animation division. Miramax's co-founders are renegotiating their employment agreements with Disney and a deal could be reached that would allow Harvey Weinstein to become an independent producer while Bob Weinstein would stay at Disney.
In animation, Disney continues to lag behind in the popular computer-generated film genre, trailing peers like DreamWorks Animation, which announced recently that it would sell shares to the public, and Pixar Animation Studios, which will end its highly profitable joint venture with Disney next year.
Disney has two computer-generated movies planned, the direct-to-video release "Twice Upon a Christmas" with Mickey Mouse, which will come out this year, and "Chicken Little," which will be released in theaters next year. Richard Greenfield, an analyst at Fulcrum Global Partners, said investors would be watching how Disney succeeded in animation on its own without Pixar.
Corporate governance issues are likely to continue to pester Disney's board. In October, a shareholder lawsuit is set to go to trial over the $140 million severance package paid to Michael Ovitz, the Hollywood agent Mr. Eisner hired as Disney's president. The trial could dredge up old information that is embarrassing to Mr. Eisner. Already some highly personal letters from Mr. Eisner to Mr. Ovitz have circulated around Hollywood and in the news media.
Disney is also seeking a new independent director, and a group of some of the nation's largest pension plans have been interviewing potential candidates in recent weeks, hoping that Disney will appoint one of them. The group is expected to propose a series of candidates ahead of a board meeting in September.
"At this point we are engaging the board; we are having a dialogue," said Christy Wood, a senior investment officer for global equities at the California Public Employee Retirement System, which called last March for Mr. Eisner's departure. "We are heading down a path of working with them."
But the real drama to be watched is how much noise Mr. Gold and Mr. Disney, who campaigned last year to oust Mr. Eisner, make ahead of Disney's annual meeting in March. The two have yet to announce any nominees to the board, and many on Wall Street are preparing for what could be a long and bitter proxy fight.
Ultimately, Mr. Gold's and Mr. Disney's success, or lack of it, will depend on the success that management has in turning the company around.
"If it is good, the board doesn't have to do anything," Mr. Greenfield said. "If it is not, they do.
