Entertainment - Disney finds Magic in Movies & Networks (G.Read)

Gene Marcial

Many investors are shying away from shares of Walt Disney (DIS) in these times of economic distress. The premise: The global media and entertainment giant's theme parks and movies wouldn't attract much business because families as well as vacationers are tightening their budgets.

Allow me to express a contrarian view: Movies are as popular as ever. Disney's newest offering, High School Musical 3, looks to continue the money-spinning success of the teen-focused franchise, and two upcoming films, Bolt and Bedtime Stories, are being lauded by analysts as potential box-office hits. Disney's home-entertainment offerings, including its ESPN and ABC TV networks and other studio creations, are gaining traction. Moreover, the theme parks aren't doing so badly.

Of course when people think of Disney, they quickly conjure up images of its theme parks and resorts. But its Parks & Resorts unit accounts for only 30% of total revenues. The company's growing family of TV networks — including ABC, ESPN, Disney Channel, Lifetime, and A&E, among others —contribute 42% of revenues. Then there is Disney's Studio Entertainment unit, which generates 21% of total sales from its animated and live-action movies, musical recordings, video programming, and live stage plays.

"In an economic slowdown, [theme] park traffic may drop, but networks and studio revenues should see them through," says Scott Armiger, vice-president and portfolio manager at Christiana Bank & Trust , which has assets under management of $1.7 billion and owns shares of Disney. Election advertising revenues could help offset reduced product advertising, and greater box-office and DVD sales could help offset weaker theme park attendance, says Armiger. And Disney's Studio business has switched its focus from quantity to quality, he notes, which means fewer but better films.

Strong Balance Sheet
With its strong balance sheet, Disney could pursue more acquisitions, buy back shares, or increase its dividend, says Armiger. He figures Disney is trading at a very attractive price of 26 a share, with a book value of $18 a share. Armiger puts the value of Disney stock at 40 a share. (The shares are down from a 52-week high of 35.02 on May 16.)

Tuna Amobi, the analyst who follows Disney at Standard & Poor's Equity Research, voices the same upbeat note and rates the stock a strong buy with a 12-month price target of 32 a share. "Amid increased concerns with a consumer spending pullback, we note Disney in recent years implemented some steps to help its parks weather an economic downturn," he says. And compared to its large media peers, Disney's exposure to advertising-dependent businesses is somewhat manageable, adds Amobi. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).In the meantime, Disney posted better-than-expected third-quarter results.

"We have been encouraged by recent trends at ESPN and ABC, and see some multiplatform upside with newer franchises such as Hannah Montana and High School Musical," says the analyst. And in these times of financial stress, Disney's strong balance sheet, with its "ample financial flexibility," is a source of comfort, adds Amobi. He figures Disney will earn $2.32 a share in its fiscal year ended Sept. 30, 2008, and $2.49 in fiscal 2009, up from fiscal 2007's $2.24. Revenues are expected by some analysts to jump to $39.1 billion in fiscal 2009, up from an estimated $37.8 billion in fiscal 2008 and $35.5 billion in fiscal 2007.

"Built-In Premium"
Without a doubt, there is value to Disney's position as a household name and global entertainment brand. As a large blue-chip company, "Disney has a built-in premium in value that provides investors a positive return on capital," says Daniello Natoli, managing director at independent investment research firm MatrixUSA . Rating the stock a buy, he says Disney's low-risk, modest valuation surely adds to its attraction as an investment.

Although some analysts have reduced their profit expectations for Disney over the next couple of years, 16 of the 28 polled by Bloomberg still recommend buying the stock. Only three recommend selling, and nine rate Disney a hold.

David Bank, who follows Disney for RBC Capital Markets , is among those who says the consensus earnings estimate for the company for fiscal 2009 need to come down given the economic environment. "It's a tough year for Mickey," he says. "But we remain committed to our thesis that Disney is simply the best-of-breed, commanding a premium multiple," says Bank, who rates the stock outperform with a 12-month target of 33.

Disney holds special appeal to investors not only because of its long track record of steady growth, but also because they can feel comfortable with the power of its widely known brand. Just ask any person from age 3 to 103.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.