Let's take a look at the numbers for the last five completed fiscal years. (Fiscal year ends in September.)
1999 1998 1997 1996 1995
Sales (in billions) 23.4 23.0 22.5 18.7 12.1
EPS $0.62 $0.89 $0.95 $0.65 $0.87
Gross Margin 30.0 33.8 41.2 38.8 35.5
Long-Term Debt (billions) 9.3 9.6 8.2 8.0 3.0
Return on Equity 6.2 9.5 11.4 7.5 20.8
That's just one seriously declining or stagnant number after another (the '95-'96 sales growth is simply a product of the purchase of Capital Cities/ABC), and the above chart probably doesn't even tell the full story. The trailing 12-month numbers are now actually even worse after the FY'00 first quarter numbers recently came in, with return on equity now below five percent. The EPS estimates for this year are $0.73 a share, and $0.89 a share for 2001 -- just awful when you look at the past history here, and probably optimistic when you look at execution over the last five years.That's just too much gravity to overcome, considering the bulk of this company, especially when you really ponder how bad things could get if the return on equity numbers don't turn themselves around drastically. Rick, who knows far more than I do about this company, has no doubt drawn out a picture about what happens when each one of Disney's five business segments simultaneously start improving on excusable slipups over the last couple of years. Let me tell you something -- it won't happen that way.
This is a pretty diverse company. One sector picks up while another slows down. Yes, all of a sudden, Who Wants to be a Millionaire? is storming the country -- but at the same time, the filmed entertainment sector is slowing down. So is the consumer products segment. The Super Bowl turns in great advertising revenue, but ABC is still stuck with a Monday Night Football package for which it seriously overpaid. The law of large numbers will tell you that these things are going to average out, with good luck and bad luck, good execution and bad execution -- evening out over a base this large. And when you're talking about nearly $25 billion a year in sales, you're talking about some very large numbers to which that law is surely going to apply.
That's why I don't see much reason for bad-mouthing any particular sector of Disney's business. Disney has been around long enough for us to know that it is a trusted brand that will produce lots of quality entertainment products. Heck, it's been doing that for the last couple of years maybe about as well as it had been during the early '90s.
The problem is that Disney bought ABC at just about exactly the wrong moment in history -- the moment when television viewership peaked, never again to return to its pre-Internet domination of American leisure time activity. All those Magical Kingdom synergies that were supposed to emerge from the marriage of such a great producer of entertainment and one of the great distributors of entertainment really never emerged -- or if they did, they're so buried under that massive $9 billion debt load that they're virtually impossible to see today.
How about valuation? While the numbers alone are reason enough to avoid this company until it can really show that it's turned this massive boat around, that hasn't stopped the market from crazily bidding up shares of Disney in the wake of the AOL-Time Warner merger. News of that deal moved the market capitalization of Disney up from about $58 billion to the current $72 billion, and the price has more or less held that level over the past couple of weeks.
But how much sense does that really make? The circumstances of the AOL-Time Warner merger are probably unique, and there's exactly one other "Internet company" that has a larger market cap than Disney -- Yahoo! Now, Yahoo! has stated that it has no intention of buying an entertainment conglomerate, so it really makes no sense that Disney's price continues to reflect the possibility that it's going to be acquired by any Internet company. I don't get it -- but the market will soon enough.
That leaves Disney priced at about $6 to $8 a share, or $14 billion in market cap, above where it was before it got swept up in merger mania pipe dreams. If there's some other reason why the company is trading at 72 times trailing earnings(!) despite the lack of growth and declining all-around numbers, I'm not aware of it. Given the fact that the return on equity numbers don't indicate that Disney is doing an even passable job in beating its cost of capital, where does the hope come in to the price of this stock? With the stake in GO.com?
I sincerely hope Rick has more in his bag of tricks than that.
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