Dueling Fools Disney's at the Bottom
Bull Argument

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Dueling Fools
By Bill Mann (TMF Otter)
October 10, 2001

Y? Because it's cheap!

A friend of mine just returned from Walt Disney World near Orlando and told me something that was pretty shocking. The place was empty. Not "the crowds don't seem to be too big" empty, but rather the "we got the first parking space on the lot and we didn't show up at 6 a.m. either" empty. "Waking up the guy who runs the Pirates of the Caribbean" empty. "Even the kids got sick of 'It's a Small World'" empty.

We're talking Rutgers Football empty. Disney's (NYSE: DIS) California Adventure empty (more on this in a moment).

The reason for this is, of course, the response to the September 11th terrorist attacks on the United States. People are just not traveling, whether they are afraid or whether they are just not that interested in showing up with young children, oh, a week before flight time to get through all the security.

Suddenly, that concept of geographical irrelevance, that people see no big deal in traveling a few thousand miles for a few days of leisure, has ceased to exist. And Walt Disney World, the single most visited tourist attraction in the entire world, is bearing the brunt.

Which is why I say "Buy Disney." Disney is in the midst of a roiling that it has not seen since Harlan Ellison was run off after one day on the job as a writer for suggesting that the company do an animated Disney porn flick. OK, maybe this is worse, but Disney is currently priced as if it were a broken company, as if it were teetering on the edge of capital destruction. So let's get all of the bad stuff out of the way and discuss the objections to Disney:

  • Revenues have grown at 15% per year over the last five years, yet earnings per share have collapsed. Where the Mouse made $0.89 per share in 1998, it is on track to make less than $0.20 this year.
  • Since Disney took over Capital Cities, which includes ABC and ESPN, it has gone from a magnificent creator of wealth to a money-losing one;
  • Disney's California Adventure, set on the same property as Disneyland, has been nearly universally panned. Foot traffic is so bad that several of the themed restaurants on the site have asked to be released from their contracts;
  • Disney's management seems to be working more for the financial benefit of itself than for shareholders, as evidenced by Michael Eisner's and other executives' rich annual pay packages despite anemic performance;
  • Go.com, Disney's Internet venture, was a massive flop. Disney online properties are now headlined by Microsoft's (Nasdaq MSFT) MSN, a tacit acknowledgement of dismal failure;
  • The attacks on America hit the tourist industry hard. Not only does Disney have its themed parks, but it also derives revenues from a cruise division;
  • The company has taken on an additional $3.5 billion in debt over the last year; and
  • Disney sports a P/E of 96.

Right now you're wondering: I thought this was the BULL argument. I'm two-thirds of the way through and I haven't seen anything good yet.

That's right, it is a bull argument. Here's why:

Everyone who invests knows exactly what is going on with Disney right now. Michael Eisner is the bobble-head doll of executive overcompensation. Disney is an obvious victim of the rapid downturn in tourist spending, and just about every one of its divisions was hit hard. Everyone knows this, and many have gone so far as to write Disney off as a broken company.

Not so fast, my friends. This is exactly the reason that one must look at Disney right now. Investors hate the company, pundits hate the company, heck, the economic environment seems to be directly opposed to the company as well.

The "rubes" who have run Disney for the last 17 years have returned to shareholders 1500% appreciation in stock price, more than 17% compounded annual growth. They have grown revenues from a hair over $1.7 billion in 1984 to $25.4 billion in 2000. Both of these rates of growth vast outstripped the performance of their benchmarks: the S&P 500 for the stock, US Gross Domestic Product growth for corporate revenues. Several of the most profitable parts of Disney did not exist when Eisner's watch began.

There is no better corporate branding than the Mouse anywhere. What long-term investors look for are companies that have an advantage so that one can say "at a minimum this company will survive the inevitable bad times." Well, we're in one now. But for whatever other problems exist in the global economy, rest assured that next year Walt Disney World will once again be the top tourist destination in the world. The long-term revenues stream for Disney from its theme parks alone is assured.

And recognize this about Disney: despite being in the midst of an economic slump this past year, at a time when the company has been forced to reabsorb and take a loss for its disastrous Internet venture, Disney will still end up creating more than $1 billion in free cash flow in 2001. In other words, while we may not love Disney's management, and while the company's current performance is not great, one could make the argument, given Disney's intrinsic advantages, that this is as bad as it gets. There is no reason at all that Disney cannot return to its high Return on Equity performances of the early 1990s -- a simple economic recovery and the absence of future kite-chasing adventures like that of Go.com would accomplish much of this.

The Mouse is not going anywhere. California Adventure is an unmitigated disaster, but there again, so was Eurodisney. Given its branding power, Disney can absorb missteps such as these better than any other consumer company out there. And the company is still making money, even in the worst of times.

Long live the mouse.

Bill Mann's favorite character is Sleepy Dwarf. All the others are tied for second. Bill owns none of the companies mentioned in this article. The Motley Fool is investors writing for investors.

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