Uncle John's Cabin

Is the House of Mouse Fooling Us?

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Disney as a company and as a stock poses a serious dilemma for me. Again, I will state, like I did for Cisco, that I believe this is a very well run company with very profitable divisions and a clean balance sheet as well as some good global exposure. For a long term portfolio, I would love to buy this on a dip and hold. From a macro, long term perspective, it's hard not to like this stock.

But here is the dilemma. Is DIS a good stock to own for the short term, especially for a 6 month competition?

Consider how their comments after earnings were perceived. I heard numbers like 85% percent of their cruise lines were booked for the year. Their hotels at the parks have not seen slower demand yet. They have properties like ESPN that has not been hit with the writers strike and it sounds like ABC will do better with the writers strike about to end soon. Everyone seemed to love the optimism that Disney said about the consumer and in particular, about the travel economy. I believe I remember hearing even the other cruise lines went up on this news.

Given that, let me make an argument that all is not a rosy as Disney would have us believe. I took a honeymoon cruise on Disney a few years ago. (Yes I can truly say my wife and I had a Mickey Mouse wedding.) We booked 11 months in advance to secure the cabin we wanted. It was a wonderful cruise and a great experience even for a couple with no children. But what does that say about Disney's "85% booking" on their cruise lines and the park hotel business? People in general, have to plan these types of vacations well in advance. Even on non-Disney cruise lines, a couple members of my family booked a post New Years cruise last summer when things didn't look so bad for the consumer and just came back. Are they planning on booking another anytime soon? No.

My point is Disney will not see a slowdown as fast as other companies because of the amount of lead time it takes to plan a "Disney Vacation" in either the parks or the cruise lines. They are probably 6 to 9 months away from seeing a slowdown in room occupancy no matter what. People that put the deposits down and planned last summer and fall to go are probably going to take those vacations this year like they planned but will probably spend less on the ships and in the parks. Now, I have to wonder what the 12-18 month projection is for the Disney vacation properties. Who is booking a Disney cruise or theme park adventure today? Probably fewer and fewer people as this economy continues to get rocked.

Here's what it comes down to. Within 6 months, will Disney's outlook on the future of their travel business sound less confident? I have to think yes. They might even see profits dwindle before then in the next 2 quarters with people that already committed to a vacation going to the parks and cruises but spending less on mouse ears and other souvenirs, dropping margins and profits with some even canceling.

So, do I buy Disney while it's hot and "sounds" like it is not seeing the consumer slow down? My answer is no. Probably by next quarter's earnings or at least within 6 months, the numbers may look OK, but the guidance will start tending lower which will drag the stock down. Don't be fooled by optimistic guidance based on an 85% booking rate on their cruise lines. This number is not a valid indicator for the current traveling consumer sentiment because it lags by at least 6 to 9 months due to the time necessary to plan and book vacations like these. If, on the other hand, you believe the company will make money elsewhere, in movies, merchandise TV and DVDs, then I could understand buying this stock now. Just don't be fooled by the false optimism about the consumer based on their vacation projections for 2008.

Good luck as always fellow investors,
Uncle John