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The Walt Disney Company (DIS)
Disney Shares Up Despite Lower Profit
Shares of Disney shot up in Wednesday trading after the company posted better-than-expected results. The Burbank, CA-based entertainment giant, known for its theme parks, television stations, and, of course, Mickey Mouse, has seen a significant turnaround since 2003. After several years of declining share prices new company leadership (and a few blockbuster movies) helped share prices soar from $18 to $32. While the big increase was certainly good news for investors they aren't out of the woods quite yet. Recessions tend to hit the company hard, both in terms of visitors to theme parks and advertising revenues. Does the company expect to run into problems as the economy tightens, or is there a little magic up CEO Rob Iger's sleeve?
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Disney announced its latest earnings, which were better than expected and certainly gave Wall Street something to be happy about after two days of losses. Shares of Disney were up by as much as 6.5% during morning trading. The company reported net income of $1.25 billion, though this was a significant drop compared to the $1.68 billion it netted at the same point last year. While some of last year's gain came from discontinued operations and the sale of a magazine, US Weekly, and one of its television channels, E!, many are worried that a souring economy could result in a further drop in profits. Revenue was reported at $10.45 billion, a 9% bump from the same period last year.
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A recession would certainly be something that Disney executives prefer not to see, especially going into the summer vacation months. The company, which operates amusement parks in both California and Florida as well as overseas, could feel squeezed if consumers have to cut back on travel due to credit worries. Disney's theme parks rake in over $10 billion each year, but tend to see tough times when the economy heads south. The company has indicated that the number of reservations in Disney-run hotels is ahead of pace compared to the same period last year, which could indicate that things won't be nearly as bad as some expect. Disney's theme parks brought in over $500 million in operating profit.
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Disney also operates several television stations, including ABC and ESPN. Just as the tightening wallets of travelers could hit its amusement parks, tightening conditions for corporations in general could cut down on advertising revenue during television broadcasts. Advertising and marketing expenditures for corporations have a relatively positive correlation with economic growth. As the economy slows businesses tend to cut back on advertising to focus on keeping operations flush with cash. If the United States were to slip into a recession, television ad sales could easily tumble. According to Disney, advertisers have yet to be squeamish over recession fears. ABC saw profits of $322 million during the latest period, a 30% jump compared to the same time the year before. In general, Disney's television interests helped the company earn $586 million in operating profit.
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Assuaging the fears of all investors is a tough work, and some analysts are not convinced that Disney is all profit and no loss. Citigroup (C: Charts, News, Offers) downgraded Disney to "sell" last week, citing uncertainty over whether or not the House of Mouse could eek out strong gains from its theme parks. At the same time, other analysts have weighed in on different opinions, which Disney executives were quick to agree with. The company indicated that it does not expect the coming quarters to be exceptionally painful. With conflicting viewpoints popping up left and right, some investors might be tempted to flip a coin or throw darts at a board to see just where things are going.
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