Dueling Fools Disney's at the Bottom
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Dueling Fools
By Bill Mann (TMF Otter)
October 10, 2001


There simply is no one who can duel with Mr. Munarriz. He can take some facts and bend them within an inch of their lives. When he starts talking about a "lockbox," I'm just going to give up and go home to mama. The problem is that Rick's arguments are as empty as a showing of Glitter on opening night.

Rick pointed out almost exactly the same challenges faced by Disney, then he did exactly as I predicted: he called Disney a broken company where things are only going to get worse. He also claimed that I would be banging the drum on valuation, and on this count he is correct. Blind squirrel and all that.

What Rick did not argue anywhere is that any of Disney's challenges are fatal.  Each of them is, in fact, correctable. Even if Disney's management fails to correct its operational problems, the company is still priced quite inexpensively at 34 times this year's free cash flow. Let's review what is built into this 34x number:

  • We've got a major bomb on our hands with Atlantis, which has earned only $105 million in the box office, failing to cover the production and marketing costs for the movie. Meanwhile, Dreamworks uncorked its own hit Shrek. Disney may not own the animated movie scene anymore, but is there any doubt that the Mouse still has movie power? Disney created a small-time winner in Emperor's New Groove when all signs pointed to disaster, and The Tigger Movie grossed $45 million even though its total cost was less than $10 million. Expect Disney to exploit its stable of characters in the future in an attempt to hit more singles. Character-driven movies lead to continued inexpensive tie-in merchandise sales. Remember, Mickey Mouse ain't got no agent. They can wheel him out whenever they want.

  • ESPN, ABC, and other television properties have been hammered by a bad advertising environment. This environment does not detract at all from the long-term power of these brands, particularly ESPN.

  • Disney's vaunted synergies have been working in reverse as its blockbusters have done everything but bust any blocks. The reality is that Disney is going to have to share the podium with some other studios, but really, do Pixar, Dreamworks, or any other of the pretenders have a long-term brand driver like the Disney theme parks? Not even close. Unless Disney's signature parks completely fall to pieces, they will help keep the Mouse brand relevant. They will give Disney good cash flow and a fighting chance at a rebound. Pixar, Dreamworks, and every other company with the possible exception of AOL Time Warner (NYSE: AOL) is just as good as its last big flick. Do you see the masses lining up for Shrekworld? I think not.

Again, the goof-ups of the recent past are correctable, just like Rick's drooling problem.

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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