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The Dow Jones industrials ($INDU) may be at a new high as a group but, as I’ve said, there are still plenty of individual companies in the index that are undervalued and have a lot of upside if investors would just have more comfort with large-cap stocks.
With that in mind, it’s time to take a new look at Walt Disney (DIS, news, msgs).
Disney, at the moment, deserves credit for nailing several of the most important items on my must-have punch list. It has new management, successful new products and is near new one-year highs -- yet it is still not getting a lot of attention. It also earns an industry-leading return on invested capital, and it has made tough new decisions to get its financial house in order.
One of the things we always look for is not just executives that can launch new products, but ones that can kill them if they don’t work out as planned. I was surprised and delighted a year ago to see that Disney’s ESPN cable sports network tried to become a mobile virtual network operator, or MVNO, to deliver sports video clips on cell phones. I never thought enough people would buy the service to pay for the cost, but I like to see companies take risks on new technologies and delivery systems.
The offering was splendid but too expensive and failed to find enough customers, and Disney decided early this month to take a $30 million charge against earnings to shut it down. That sounds like a lot of money, but to a company this size, it’s a rounding error. It’s cool to see new Chief Executive Bob Iger has the guts to admit defeat and move on. (Iger doesn’t have a golden gut, by the way; he was one of the execs at ABC who thought the hit show "Lost" would bomb.)
What’s important to realize is that not everything will work, but Disney is unique among media outfits in that it can leverage its creative products across multiple divisions: film, cable television, broadcast television and theme parks. Plus, it can blast its creative successes across the earth, to customers in India, China, Europe and Latin America, under a brand name that is well-known and loved.
A lot of people wonder whether Disney is a bad company to own in an economic slowdown. Under prior management, the stock went goofy in the last bear market, sinking from $43 in 2000 to $13 at its low in 2002. But Iger and his team have told investors they have a lot more financial flexibility now: Theme parks can be opened for fewer hours per day if business warrants, and its cable networks depend on advertising for just 25% of their revenue. The broadcast network ABC, of course, depends on advertisers’ largesse, but don’t forget that advertisers sometimes increase their spending in downturns to gain market share.
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Another major new development at Disney is the integration of its purchase of Pixar, the animated film house. The company has proudly reported that it didn’t lose a single Pixar employee in the transition. Moreover, Disney’s chief financial officer told analysts at Atlantic Securities this week that Pixar has not put out a schedule for new movies to make sure that they are released when ready -- and not to satisfy a calendar.
The biggest plus in Disney’s film department, of course, is its "Pirates of the Caribbean" franchise. The second in the series was the highest-grossing film of 2006 to date. Although I haven’t seen it, my kids said it was outstanding. The third “Pirates” installment is due to come out next year, and you can count on a big DVD and video-game push for the second movie and new themed rides at the parks.
The ABC network news unit at Disney has also been getting a lot of attention lately as its investigative unit, headed by Brian Ross, has broken the Rep. Foley sex-scandal story. But ABC’s drama lineup has also done exceptionally well, scoring the highest ratings among the four big networks in the first week of the season even without the premier of the hit show “Lost,” which launched two weeks later.
Putting it all together, I think Disney can surprise the Street by pulling in around $1.78 in earnings per share in fiscal 2007. If you put a 21 times earnings multiple on that you get a price target of almost $38, which would be up 22% from the current quote. It’s a buy, and I urge you to be patient through any short-term turbulence.
Meet Jon Markman at The Money Show
SuperModels columnist Jon Markman will appear along with many other top investment professionals at The Money Show in San Francisco, Oct. 16-18. Jon will hold seminars titled "Swing trading for value investors -- The new buy and hold," "New trends and profits in online investing" and speak on panels titled "Put the 'Best of the Best' to work for you" and "Smooth sailing in a bumpy market." Admission is FREE for MSN Money users; you'll need to register at the Money Show Web site.And, if you can't attend, join in the free webcast of the "Smooth sailing in a bumpy market" session, featuring Markman as well as MSN Money columnists Jim Jubak and Bob Walberg, and moderated by MSN Money Editor-in-Chief Richard Jenkins. Visit MoneyShow.com to register, then return for the webcast on Oct. 18 at 10:40 a.m. PDT.
Jon D. Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman did not own shares of companies mentioned in this column.
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