The Bloom is Off at Disney?

Well, it had to come sooner or later.  Disney stock got hammered today on a couple of pretty negative financial pieces.

The first was the downgrade from Merrill Lynch to Underperform for Disney’s stock.  Both yesterday’s Wall Street Journal and the downgrade today called into question the economic sensitivity of Disney to the economy.  The WSJ article in particular noted that while Disney shares certainly commanded a better return than the other studio stocks (which are all down more than 20%) due to more diversification and less reliance on advertising than their peers.  They noted however more or less what the Merrill Lynch’s posting today noted as well: that 60% or more of Disney’s business is economically sensitive in their opinion. Disney’s stock slid 6% on the day and is down almost 15% since mid-Friday.   

The second was the announcement from the Oriental Land Company that they are abandoning their interest in building a entertainment complex in a never named Japanese city (but presumably someplace like Osaka).  While we all know that Disney doesn’t own any part of the OLC or this action (it holds a license remember), it’s interesting to note the specific reason given:  that the estimated investment return would not justify the project. 

That can mean a number of things, but most likely to me it means that while the project would make money, it won’t make enough to exceed the cost of capital required to build it over it’s estimated lifespan.  That’s a big and insightful admission coming from a group that invested LOTS of money in building Tokyo Disney without expectation presumably of seeing their money back for sometime (though given the age of the parks now, I’m sure they’ve made their money back several times over).

It also doesn’t seem to bode too well for the blue sky discussions that Jay Rasulo had sometime ago about urban entertainment centers in this country.  Some say that Jay is beholden to that idea, but my take is that he was floating it to see what the interest was:  probing if you will.  They’ll build out Hawaii first to get a flavor and use the cruise line to build trend history for such things before making a huge bet I think, but that’s just my opinion.