Margins? Both gross and net margins improved in the December quarter. Analysts expect that to continue. Disney is, and will continue to be, a money machine. Even though earnings dipped in 1998 and 1999, cash flow from operations continued to set new highs.
Debt? Entertainment is a leveraged industry. Disney is one of the few players who have been able to manage its borrowings to produce consistent profitability. Until 1999, Time Warner had reported losses in 11 of the past 12 quarters. Disney is run with greater attention to the bottom line. Disney is asset-rich enough to take on the debt. It borrows at attractive rates, then employs the capital to grow its business through development and acquisitions. When prudent, it buys back its own stock.
Earnings and sales growth? Ever since Disney's December showing, analysts have been ramping up estimates. The projections now call for the company to earn as much as $1.07 next year. Bill was shocked that Disney was trading at 72 times trailing earnings (which includes some nonrecurring charges, by the way). Would he be surprised to know that it is selling at just 33 times next year's expectations. And, hey, isn't that the amazing earnings growth that our naughty villain didn't see here? Revenues won't keep up. The company is on a mission to shave expenses and that will mean things like less live-action movies being produced (a good thing, really) without sacrificing the growth segments.
Return on equity? I'm glad Bill brought this up. The reason Disney's ROE is so low isn't because the earnings are so small -- it is because the company's assets far outweigh its liabilities. Like I said before, Disney is asset-rich. Some assets, like land and projects in development, are not producing income right now. Are we going to fault Disney for its billions in intangible assets ($15.7 billion to be exact)? Disney is trading at just 3.5 times its $10.18 a share in book value. Time Warner was originally set to be bought out for 18.6 times book value. If Disney were to receive that kind of multiple on its shareholder equity, it would be fetching $190 a share.
Now that would be a fairy tale. But that's as realistic as some of Bill's bearish assumptions. If Bill doesn't see how record Super Bowl advertising is going to bring much higher rates to the Monday Night Football franchise later this year, I'll e-mail him the two-point connect-the-dot diagram. If Bill thinks that $9.3 billion in debt will hold down a company with $43.7 billion in consolidated assets, then I think someone ripped out the last few pages of his copy of Gulliver's Travels. If Bill can't see the potential of a revamped GO.com as the premier entertainment destination given Disney's many leisure brands as we move to a wider acceptance of multimedia-rich broadband, then I guess he's a fan of Sleeping Beauty.
"Where does the hope come in?" Bill wrote. It's in the eyes of his two-months-old daughter. And Bill, I have a condo a stone's throw away from Disney's Animal Kingdom. You can borrow it when she is ready to travel.
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