Dueling Fools Disney's at the Bottom
Bear Rebuttal

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Dueling Fools
By Rick Aristotle Munarriz (TMF Edible)
October 10, 2001

Long live the mouse, Bill says. Why has it set mousetraps all over its fundamentals? I ask.

Bill's friend doesn't need to tell me about the tumbleweed at Disney World. My wife and I own some condo rental property right at Disney's doorstep, and I dread the management company reports we get every month. The occupancy rate has been running about as high as a Wade Cook Self-Made Millionaires reunion.

The thing is that Bill is playing off the brand's strength like it was Woolworth's or Kodak (NYSE: EK) or something. Oops, bad examples. But you get my point. If Disney's future legacy starts at the animated classics of today, then watching Katzenberg go is like saying the Chicago Bulls are still something, even without Michael Jordan.

But then my friend Bill tries to pull two fast ones past you. First he talks about Disney's billion dollars in free cash flow. For starters, with Disney's $40 billion market cap and the fact that it has $8 billion more in long-term debt than it does in cash, the company's enterprise value is nearly 50 times that amount. Bill, Disney is getting cheap with its products, not with its stock valuation.

Let me also explain why he is talking free cash flow over earnings. Disney has overpaid for a lot for its past acquisitions -- from Capital Cities to Infoseek to sports teams. By going the cash flow route Bill can simply wave Mickey's sorcerer wand, and, poof, the heavy amortization and depreciation of Disney's past mistakes go bye-bye. Clever trick. The other part of free cash flow is capital expenditures. Disney won't spend the money to update its parks or produce quality entertainment and free cash flow gives that kind of nearsighted stink-think a standing ovation.

The other "fast one" is that Bill tries to play off fiscal 2001 as the bottom. Hey, look down, it's fiscal 2002! Analysts already expect theme park operating profits to slide. ABC will be going from the top-rated network to, probably, number three. The consumer products division is going to have a heavy burden in convincing people that Atlantis is a video worth owning and it's actually down to giving away a free Disney DVD to spur pre-orders for its Snow White release.

Walter Elias Disney would be turning 100 years old if he were still alive today, but he's probably simply turning in his grave. Like Bill, I think Disney will eventually get it right. It has the proper ingredients. It only needs the recipe and the serving suggestions. But we are nowhere near the bottom right now. Follow Sleeping Beauty's lead and just let this one rest for a while. You'll know when you've been given your wake-up kiss.   

Rick Aristotle Munarriz has been to Disney World more times than he can honestly remember. He also owns shares of Disney, though it's a Minnie part of his portfolio. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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