Worth/April/One Stock/Disney
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99/04 - One Stock/ Disney's World
By Justin Martin
>>Is the stock a relic or a play on the future of info-tech-net-tainment? Last year, the company bet $5.2 billion on the latter.
FACT FILE
DISNEY
CEO: Michael Eisner
HEADQUARTERS: Burbank, California
MAJOR BUSINESSES: Broadcasting, films, theme parks,
books, retailing
EMPLOYEES: 117,000
STOCK SYMBOL: DIS
RECENT SHARE PRICE: $34
DIVIDEND RATE: $0.21 a share annually
SHARES OUTSTANDING: 2.048 billion
SHAREHOLDERS: 588,000
INSTITUTIONAL HOLDERS: 43 percent
TOTAL 1998 REVENUE: $23 billion
CREATIVE-CONTENT REVENUE: $10.3 billion
BROADCASTING REVENUE: $7.1 billion
PARKS/RESORTS REVENUE: $5.5 billion
Sources: Disney annual report and other sources
The house the mouse built: Is it about the future or the past? It's now possible to surf into Disney's virtual online store and buy a Mickey Watch, something introduced in 1933--before the advent of TV. It shouldn't be long before Snow White and the Seven Dwarfs becomes available in DVD, the new format for viewing movies at home. As Disney approaches the millennium, it is keeping one eye trained on its storied history and the other on emerging media outlets and .coms galore.
At the moment, this strategy is producing a blurry picture. Disney has just racked up a third straight quarter of down earnings. Sky-high film production costs and disappointing ratings at the Disney-owned ABC network certainly contributed to the malaise. But another key factor was the $5.2 billion Disney spent in 1998 on capital projects. Much of this was aimed at jump-starting its earnings growth, including investments in its television and film brands, its Animal Kingdom theme park, and the Disney Cruise Line.
Operating earnings at the Disney division that produces movies fell 17 percent in 1998 to $1.4 billion. Disney's remedy: Abandon the search for the magic smash-movie formula. Focus on cutting expenses. Disney's Armageddon grossed about $200 million in the U.S. but cost around $100 million to make. By contrast, The Waterboy, also from Disney, has already grossed about $150 million but cost roughly $50 million. Same profit, but the costlier film risked being a more expensive bomb. Thus, expect more Waterboys--movies smaller in scope and budget and less laded with special effects. The plan is to make fewer films, too. Disney made 22 live-action films in 1998 and is aiming for more like 15 per year in the future. Disney also plans a renewed emphasis on what it does best: animated features. Costs associated with animated works are easier to predict and contain, plus the Disney name carries unparalleled brand equity. In 1999, for the first time in its history, Disney will have three major animated releases in a single year: Tarzan, Toy Story 2, and Fantasia 2000.
Disney's broadcast division is also revamping. Ratings are down at ABC, for many of the same reasons they're down at NBC and CBS: Cable and the Internet are stealing viewers. Disney's strategy here: If you can't beat 'em, join 'em. It so happens that when Disney purchased Capital Cities/ABC in 1996 the company also acquired ESPN, brand one among cable channels. Sure, ABC has been a bottom-line dud. But the reality is that the network accounts for less than 10 percent of the broadcasting division's operating earnings. Meanwhile, operating income rose 20 percent in 1998 for Disney's cable properties, which include, in addition to ESPN, Lifetime, A&E, and the History Channel.
Disney also recently decided to get on the Internet in a pure-play kind of way. It bought a 43 percent stake valued at $1 billion in the search engine Infoseek. Together, the two companies launched the Go Network, a portal similar to Yahoo and Lycos. But in this case, the portal's unifying feature is that it links users to various Disney sites, for sports (espn.com), news (abcnews.com), E-commerce (the Disney Store Online), and so forth. Launched in January, it's already among the five most popular sites on the Net.
MANAGEMENT
Disney's management is known for a maddeningly hands-on style. This extends all the way up the corporate ladder. CEO Michael Eisner regularly comments on movie releases and tests rides at the theme parks. His initial displeasure with Alien Encounter, a Walt Disney World attraction, repeatedly forced a team of so-called Imagineers back to the drawing board.
Eisner is an intense boss, known for thriving on creative conflict. He also has trouble sharing power. There hasn't really been second in command at the company since Frank Wells died in a helicopter crash in 1994. Michael Ovitz, co-founder of the Hollywood talent agency CAA, held the chief operating officer's post at Disney for just 16 months. Feeling stymied, Jeffrey Katzenberg departed Disney to start up the DreamWorks SKG studio with Steven Spielberg and David Geffen. Eisner had open-heart surgery in 1994. Investors worry about the lack of a succession plan.
There has also been a lot of turnover at the position of chief financial officer. Richard Nanula and Stephen Bollenbach each received offers too good to refuse--the CEO jobs at Starwood Hotels & Resorts Worldwide and Hilton Hotels, respectively. So Tom Staggs is the third CFO in seven years. Still, there's no question the talent pool runs deep at Disney. ABC boasts such high-profile executives as Robert Iger, president of ABC, and Jamie Tarses, the woman behind the NBC hit Friends. A prime mover on the animation front is Roy Disney, Walt's nephew. "We are hell-bent on not being in a railroad car as jets fly over us."
--EISNER'S WAY OF EXPLAINING WHY HE KEEPS PUSHING DISNEY INTO NEW TECHNOLOGY
THE PRODUCTS
Disney divides neatly into three divisions: creative content, broadcasting, and theme parks/resorts. But it's truly a diversified media company. The three divisions contain literally hundreds of properties. In addition to producing films, for example, the creative-content division includes nearly 700 Disney stores. Creative content also houses Disney's publications, among them Jane, Discover, Women's Wear Daily, and Topolino, a general-interest title that has three million readers in Italy. Broadcasting includes ten ABC-owned television stations in major markets that reach about 25 percent of the U.S. population.
Disney owns the Mighty Ducks franchise in the National Hockey League and a 25 percent stake in the Anaheim Angels baseball team. Book publisher Hyperion has had such recent hits as Brain Droppings, by George Carlin, and Malachy McCourt's A Monk Swimming. The company makes plush toys and figurines galore and licenses countless other products that feature its characters. Disney also does a sizable straight-to-video business, including such films as The Lion King II: Simba's Pride. There are also several smallish record labels in Disney's stable: Mammoth, Hollywood, and Lyric Street. Releases include everything from Disney- movie sound tracks to the rock band Squirrel Nut Zippers. Brand-new from Lyric Street: Tigger Mania, featuring Peter Frampton.
The Competition
The most direct competitor is Time Warner. The two companies bump up against each other on numerous fronts: movies, magazines, books, music, cable, and TV syndication. Disney also dukes it out with the other diversified media companies. Viacom, for example, owns Paramount Pictures, MTV, and Nickelodeon, one of the most visible competitors to Disney's children's programming. Rupert Murdoch's News Corp. pits its Fox network against ABC and its 20th Century Fox against such Disney studios as Touchstone, Hollywood, and Miramax.
A couple of other main rivals in the movie biz are Sony and DreamWorks. Recent DreamWorks releases include The Prince of Egypt and Antz, making it a prime competitor in animated films. The company also runs up against AT&T, TCI, Yahoo, the Lego Group, and Seagram. Seagram owns both Universal Studios and the Universal Studios theme parks, which compete with Disneyland and Walt Disney World. Lego is in the process of opening a theme park in Southern California. Yahoo is one of many portal sites that compete with Disney's Go Network. The new AT&T/Excite/ @Home combo also competes in this space. TCI's Liberty Media has joined forces with Fox Sports Net to try to wrest away some of ESPN's dominant regional coverage.
"Disney has an enduring quality, though of late they've fallen into trouble because of stagnant earnings. But as shareholder, I feel they are building properly. Short-term folks on Wall Street punished Disney last year when its stock was down. But they were just taking a step backward. Even if they sacrificed earnings last year, I feel they're doing the right strategic things for the long term."
--SCOTT CHAPMAN, CO-PORTFOLIO MANAGER, FOUNDERS GROWTH FUND
WHAT IT'S WORTH
Disney has traditionally been a formidable growth stock. But it's unlikely to manage much of an increase in 1999. This will be another transitional year, spent working out strategic kinks. As a result, the stock price may just hover within its recent range in the mid- to high $30s. Still, Disney offers good value by several measures. Its EBITDA- based valuation, for instance, now compares more favorably to that of other media companies than it has in the past. This is a good tool to use--EBITDA stands for earnings before income taxes, depreciation, and amortization--for media companies, which are often highly leveraged because of acquisitions they've made. Currently, Disney's stock trades at a multiple of 1.28 times EBITDA. That compares with a 1.30 for Time Warner and 4.83 for News Corp. Among the major diversified media companies, only Viacom (1.24) has a lower EBITDA multiple.
The strength of the Disney brand name also invites comparisons with the McDonald's and Coca-Colas of the world. An effective valuation technique here is one that pits a stock's forward price-to-earnings ratio against its earnings growth rate. By this measure, Disney's stock is trading at a multiple of 2.2--lower than Coca-Cola, Procter & Gamble, and Gillette. Says Stewart Halpern, an analyst with ING Baring Furman Selz: "Disney's p/e in isolation typically looks high. But in relation to growth rate, it looks more justified."
It's also possible to look at Disney alongside various Internet companies. On this score, valuing the company is a no-brainer. Because it actually has earnings, unlike most Internet ventures, Disney looks supremely cheap.
These yardsticks suggest that Disney is probably a reasonably safe buy right now. Though the stock may languish for a while, it should spike as soon as the market thinks the company has recaptured momentum. Over the past 15 years, Disney has increased earnings per share at a compound annual rate of 20 percent. Analysts predict Disney will earn $1.04 a share in 2000, up 16 percent from 1999. That could help push the company's stock up to around $45 a share.
"The big difference between Disney and other media companies: Disney has Mickey Mouse and the Walt Disney brand. When you think of Time Warner or News Corp., no one thing really jumps out at you. News Corp. is working real hard to build the Fox brand. Time Warner has individual brands like CNN and Fortune, but no single example of what the company stands for."
--DAVID SETTE-DUCATI, MEDIA ANALYST, MFS INVESTMENT MANAGEMENT
SOCIAL RESPONSIBILITY
Nothing too sinister lurks behind that squeaky-clean image. Disney is truly a goody-goody. There was a short-lived controversy about garbage at the theme parks, but Disney responded by becoming a model recycler. The company does diversity with aplomb. It hires handicapped employees at its theme parks and other operations. It is progressive on gay and lesbian issues and was among the first firms to make sexual orientation part of its anti-discrimination policies. Women and minorities hold numerous executive positions throughout the company and are also well represented on the board. Disney gives generously to charity. It's especially strong in its support of public/ private initiatives geared toward such issues as education and affordable housing. About the only egg on Disney's face has to do with substandard conditions at some of the factories to which it subcontracts work, particularly those in Haiti and Vietnam. Shareholder activists are currently urging a number of U.S. companies, including Disney, to adopt a code calling for better working conditions at overseas subcontractors
THE UPSIDE
Disney has remarkable brand equity. Parents choose movies for their kids and buy products on the strength of the Disney name. This gives Disney instant clout in the Internet arena versus Yahoo, Lycos, and AOL. Already it boasts a site called Family.com, and the company is in a better position than other Internet players to ease parental concern about Web content.
Moreover, Disney now gets only 21 percent of its revenue from overseas. That leaves plenty of room for international growth. Try these numbers on for size: Annual per capita spending on Disney products is $33 in the U.S. versus $6 in Spain and just ten cents in China.
THE DOWNSIDE
Disney's businesses are highly cyclical. Operating margins fell overall in 1998, to 17.5 percent from 19 percent in 1997. Creative content has the weakest margins (13.6 percent), followed by broadcasting (18.6 percent). Theme parks/resorts are strongest, at 23.3 percent. But theme parks are also the most susceptible to an economic downturn. One of the ways that the Asian crisis hurt Disney: Fewer Asians vacationed in Southern California and visited Disneyland this past year.
WHO NEEDS IT?
This is a long-term play, good for placing in an individual retirement account or socking away in a kid's college fund. << |
