Analyst upgrades Disney as economy, ad sales improve, but weakness in film, theme parks remain

Analyst upgrades Disney as economy improves

PHILADELPHIA — An analyst upgraded Walt Disney Co. on Monday, citing an improving economy that should give a lift to its business. But he also warned that the entertainment company’s earnings will lag its peers due to weakness in its film studios and theme parks.

JPMorgan analyst Imran Khan raised his rating on Disney to “Neutral” from “Underweight” and increased his price target to $30 from $28.

He said the outlook for Disney’s cable channels, such as ESPN, is improving. Cable networks make up 70 percent of fiscal 2010 operating income. Khan is forecasting $4.66 billion in operating income for the unit, up by $108 million from his prior forecast due to an advertising recovery and strong ratings.

He’s projecting an 8 percent growth in ad revenue this year.

Disney’s studio unit should recover as well, although not to the levels seen in recent years. Khan expects operating income to rise to $517 million this year from $175 million in 2009, but noted that in prior years it has been more than $1 billion.

“A full earnings recovery of the studio’s earning power is likely to take the new management team time given the long lead time of producing and releasing a film,” he said.

Disney’s parks and resorts, however, will fare worse.

Khan said discounting will continue drag down earnings. Morever, revenue would have to grow by 5.1 percent just to offset higher pension and benefit costs, but he believes that’s unlikely because consumer spending is expected to decline.

Khan expects parks and resorts to show a 7.4 percent drop in 2010 operating income.

Shares of Disney, based in Burbank, Calif., were up 21 cents to $29.75 in morning trading.