From Barron's this weekend,
Walt Disney has had a tough year because of troubles at its ABC TV network and slowing sales of videos and merchandise, partly related to the Asian economic slowdown.
With Disney's profit set to decline in its current fiscal year, ending in September, to 80 cents a share from 89 cents in the 1998 fiscal year, the company's stock has moved little in the hot entertainment and media sector. Time Warner and Viacom are up more than 85% in the past 12 months, while Disney, at 35 13/16, has risen just 2% after gaining 5/8 last week.
Disney's fans maintain the admittedly lackluster profit outlook has obscured the company's growing attributes, notably ESPN, other cable assets and its Internet presence.
"An awful lot of asset value is being built up in the company while reported earnings have been going down," says Richard MacDonald, media analyst at J.P. Morgan. He believes Disney could hit 48 in the next year based on his estimate of Disney's asset value of 60 a share.
Disney has generally been valued based on its reported earnings or cash flow. But MacDonald says an asset-value calculation makes sense because Disney has valuable interests, including stakes in Infoseek, the Internet portal company, and various cable operations, notably the Art & Entertainment network and Lifetime, which contribute little or nothing to reported earnings.
MacDonald calculates that Disney trades for about 15 times projected calendar 1999 cash flow, a discount to Time Warner, which has a cash-flow multiple of 17. Adjust Disney's cash flow for its non-income producing interests and its cash-flow multiple falls to 13, he figures.
MacDonald is well aware of all the knocks against Disney. ABC is suffering from weak ratings and higher sports programming costs. Video and merchandise sales have been flagging. Disney's lucrative animated movie business faces stiffer competition from Dreamworks and other studios. And Disney World could lose business to the new Universal theme park, Islands of Adventure.
MacDonald argues that Disney's earnings and cash flow should grow rapidly starting in fiscal 2000. Disney has been criticized for paying too much for Capital Cities/ABC in 1996, but MacDonald argues that ESPN alone was worth the $19 billion purchase price.
What can Disney do to lift its stock price? MacDonald suggests it should consider issuing a tracking stock for its Internet and other new businesses. Disney also could sell non-core assets, such as radio stations. And MacDonald says Disney should start an aggressive share-repurchase program.
Disney has the wherewithal for a big buyback program given its formidable balance sheet. With an equity market value of $72 billion, Disney is worth less than America Online, which is valued at $90 billion. To Disney's fans, this doesn't make sense.
Jay |
