Walt Disney Co posted a 26 percent plunge in quarterly earnings on Thursday, underlining the continuing effects of the recession on advertising and consumer spending, but beat Wall Street forecasts by a hair.

Disney shares slid by as much as 3.5 percent before changing direction to recover all their losses in after-hours trading.

Investors dumped shares after the No. 1 U.S. entertainment company missed revenue expectations and met its earnings target mainly through cost-cutting, Caris & Co analyst David Miller said.

It looks like it was a cost-driven quarter, Miller added.

Disney Chief Executive Bob Iger told analysts on a conference call that the company sees, signs of economic stabilization, but the pace and strength of the recovery remain uncertain.

Disney's two profit powerhouses, its cable networks and theme parks, seemed to have stopped a free-fall in sales for a second quarter, but have not yet turned a corner to return to growth.

Net income in the fiscal third quarter, ended June 27, was $954 million, or 51 cents per share, compared with $1.3 billion, or 66 cents a share, in the year-ago third quarter.

Excluding certain items, Disney had a profit of 52 cents a share compared with analysts' average expectation of 51 cents, according to Reuters Estimates.

Third-quarter revenue fell 7 percent to $8.59 billion from a year ago and lagged the $8.84 billion expected on average by analysts, according to Reuters Estimates.

There were not a lot of surprises. Nothing stands out of the ordinary or anything that people would not be braced for, Edward Jones analyst Robin Diedrich said.

In terms of cable networks, they're doing pretty good and we expected them to do a little better than some of the others (media companies). The broadcasting was, not surprisingly, more difficult, Diedrich said.

A TURN IN THE STOCK MARKET

Operating profit slid 13 percent at Media Networks, with a stronger performance by sports network ESPN and other cable networks masking weaker ad sales and ratings, coupled with higher programing costs, at the ABC broadcast network.

A deferral of affiliate revenue, fewer National Basketball League games and continued weakness in several major ad categories hit ESPN's revenue and profit in the quarter.

Quarterly ad revenues at ESPN, adjusted for the missing games, were down about 10 percent compared with last year's third quarter, Disney Chief Financial Officer Tom Staggs said.

Staggs said Disney was still in the midst of upfront advertising sales and was comfortable with the prices ABC was commanding. The network expects to sell less upfront inventory this year, as some major ad buyers are sitting on the sidelines, but believes it is well positioned for spot sales later in the quarter, Staggs said.

Miller said Staggs assessment was pretty universal so far in terms of what we heard from peer media companies in this earnings period.

There is a turn in the stock market, but no change in core business yet.

Deep hotel and ticket discounts at Disney's domestic theme parks pulled in visitors, raising attendance by 3 percent, but sliced revenue by 9 percent and profits by 19 percent.

Fourth quarter bookings were running 7 percent behind last year when an extra week in the fiscal quarter was excluded, Staggs said. The Disney executives declined to say whether the discounts would be discontinued, as planned, this fall.

Disney Studios turned to a loss and saw revenue drop by 12 percent on weak DVD sales and TV distribution and on a less popular release slate, including Bedtime Stories, Tales of A Shopaholic and Bolt, compared with 2008's National Treasure 2 and Enchanted.

A dismal retail environment and the loss of royalties from Disney Stores North America, which Disney reacquired last year, coupled with lower licensing royalties drove down Consumer Products revenue by 10 percent and profits by 37 percent in the quarter.

Disney's Interactive Media Segment cut its prior year quarterly loss on lower costs, but weaker sales of its games cut revenues by 20 percent.

The entertainment and media conglomerate's shares were flat in after-hours trading after closing at $26.22 on the New York Stock Exchange.

(Reporting by Gina Keating; editing by Gary Hill and Andre Grenon)

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