Disney Bull's Rebuttal
by Jeff Fischer ([email protected])

Rick, you begin by mentioning Disney's valuation, as I suspected, so I had already covered valuation in-depth in my first argument. Let's quickly review.

You mention the above 30 P/E as being more than twice Disney's growth rate, but Disney actually increased pro forma earnings per share by 25% last year, and analysts expect the company to grow earnings per share by 24% this year and 18% next year. This sounds high to me (Disney has grown EPS only 15% annualized for the past five years), but let's accept the 18% earnings growth that is expected at Disney in fiscal 1999, and maybe we can hope for growth near the 24% anticipated for this year. (In late January the company announced record first quarter earnings, showing net income growth of 18%.) Next, let's remember that the stock is trading at 10 times cash flow, 4 times book value, and 3 times sales, and this is more meaningful than the current 37 price-to-earnings multiple.

Does the share price look unreasonable for the leading entertainment and theme park company in the world? Disney itself didn't think so. The company bought back 8.5 million shares in 1997 at an average price of $75 per share, spending $633 million in total, and it has plans to continue to repurchase shares with its substantial cash flow.

You also worry that Disney has lost its competitive edge -- that it no longer has a monopoly on animated movies. I contend that Disney never did have a monopoly and that the market is large enough for every company to prosper. If I had to be just one company in this industry, though, I would want to be Disney -- without a doubt. In the last two years the company has made serious money with family oriented films like Hercules, The Lion King, George of the Jungle, 101 Dalmatians, Bambi, and Sleeping Beauty -- either in movie theaters or on home video, or, in the best cases, both. (Not to mention other Disney movie hits, including Ransom, Con Air, The English Patient, Scream, and Scream 2).

The film industry is one of the largest in the country and Disney has a key position in that industry that no company can realistically usurp, especially in the children and family market where Disney owns nearly all of the popular cash cow characters that any child could name before you can spell "M-I-C-K..." These cartoon characters are popular generation after generation. That's very important! And this popularity also trickles down to the Disney Stores, which are seeing continued success as the company continues to open new locations that number in the hundreds.

You next mention that 1997 was a record year at the Walt Disney World theme parks due to the 25th anniversary, and that any subtle drop in attendance in 1998 could have dramatic results. I admit, I doubt that 1998 will see as many visitors to the Florida Disney World theme parks, but that's hardly a reason to turn bearish on the company following a record year. And actually, attendance in 1997 was already down from the prior year at Disneyland, for example, yet record results were due partially to increased spending from visitors who did attend. Also, attendance this year might not be as slow as you think because the new Animal Kingdom park is opening in Orlando.

Looking closer at the theme park business, in 1997 theme parks accounted for $1.1 billion of Disney's $4.3 billion in operating income, while creative content and broadcasting accounted for the other $3.2 billion. The majority of money is in the media biz, not the gigantic theme park business, though if I had to be a company involved in theme parks, again, without a doubt -- I'd want to be Disney. To run the huge Disney parks (which are like small countries) as profitably as Disney does is incredible. Cities or districts like Washington D.C. should sit up and take notice.

Finally, you slam Disney's ABC for being the number three network, and you say ESPN is threatened by CNN/SI. ABC may be number three in the ratings, but it still outperforms CBS in advertising because ABC has a younger audience at about 40 years of age. CBS's average viewer is aged 52. Advertisers pay much more for the lower aged demographic. Even being number three in the ratings (out of the three largest networks in the country) isn't bad -- Disney made money last year on ABC. And let's give Disney longer than 24 months to get some spunk into its new ABC division. Finally, ESPN has not seen any ill effects in its advertising revenue due to CNN/SI -- in fact, just the opposite. Demand for advertising increased to new record levels in 1997. ESPN is easily the dominant name in cable sports, and with the new ESPN store launched and ESPN Grill and ESPN Magazine launching in 1998 -- and with Disney's bulk behind it -- it should continue to do very well.

It's been fun, Rick. Don't lose that Disney magic! You might consider buying stock in a company whose products you and your family enjoy every day -- whenever you turn on the radio, television, watch a movie, read a book, see a hockey game... you get the idea. Fool on!

Next: The Bear Responds