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Disney: The Mouse Roars

Buying Pixar in January and making Apple Computer genius Steve Jobs the largest shareholder didn't rouse Disney's sleepy stock. But today's terrific earnings news has investors' attention.

Disney has been the ugly duckling of the new-media age. The stock (symbol DIS) has done nothing for shareholders during the 2000s despite frequent analysts' buy recommendations and expressions of faith from frustrated fund managers who suggest that the company was misunderstood and unjustly undervalued.

So it's tempting to be skeptical about today's 7% rise, to $27, on much-better-than-expected quarterly earnings. Disney has raised investors' hopes before, only to fizzle because of movies that bombed or because of intrigue in the boardroom. At today's price, Disney still trades 40% below its all-time high, reached in 2000.

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But Wall Street is taking the results for the first quarter of Disney's fiscal year as a sign that freshman CEO Robert Iger knows what he's doing. Iger's announcement that Disney would sell its radio stations, repurchase $5 billion more (almost 10%) of its stock, and do a better job with Disneyland and Disney World is music to the ears of shareholders. ABC and ESPN are doing well, and Pixar, the animation company that Disney is acquiring, should be a good fit. The foundation is there for better company-wide performance.

Analysts are still digesting the quarterly earnings, which came in at 37 cents a share (35 cents if you discount a small one-time gain) versus the average estimate of 30 cents. But observers are more optimistic about the stock than they were a few days earlier. CIBC World Markets, Credit Suisse, Prudential Equity Group, and Lehman Brothers all raised estimates last night or today for the fiscal year ending next September 30. Prudential is the most bullish, raising its price target on the stock from $34 to $36. Others are still calling for $28 to $32.

At the current level, Disney trades at 20 times the past 12 months' earnings, so it's not seriously cheap. There's also not much of a dividend. But this is supposed to be a growth stock, not one you buy for yield or because the price is low. And the strong quarter suggests that Disney may be at a tipping point. It's possible that earnings growth, which had been 12% a year, could be on the verge of accelerating to 15% to 17% over the next few years. If so, the rally in the shares won't be just a day trip to the Magic Kingdom.

--Jeffrey R. Kosnett

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