Walt Disney (NYSE: DIS ) CEO Bob Iger is a thief and poised to make out like a bandit. And you know what? I love that about Iger, and Disney.
I wasn't always this cheerful about the Magic Kingdom. In August, when Disney made a $4 billion bid for Marvel Entertainment, I cried foul. The comic book king had accounted for more than 20% of my portfolio, and was, by my math, still undervalued at $4 billion.
"Disney gets Marvel for just north of 20 times earnings. That sounds expensive, I know. Here's why it isn't: Long before Iron Man was a box-office blockbuster, Marvel was boosting operating income by 28% a year," I wrote at the time.
Marvel officially ceased to exist as an independent company on Dec. 31, 2009. Disney shares have run about even with the market in the months since, which I'm not so sure is fair. Isn't Marvel a catalyst for this business, just as Pixar was? And shouldn't we be encouraged that the largest single shareholder is Apple's (Nasdaq: AAPL ) Steve Jobs?
Good questions, all. Let's dig into both the bull and bear arguments for Walt Disney.
The bull argument
Buyers will tell you that Marvel is remaking Disney. "After its acquisition of Marvel, Disney is now armed with tools it has been missing for years and will be able to capture more of the men's (and boy's) entertainment market," wrote Foolish investor ALevolved two weeks ago in this pitch.
Broadly speaking, ALevolved is referring to the entertainment gender gap that the House of Mouse has had trouble bridging. Preteen boys are more likely to gravitate to superheroes and sports than to princesses and Hannah Montana. My daughter loves Disney; my sons prefer Marvel and Hasbro (NYSE: HAS ) , whose Transformers and G.I. Joe characters are favorites among boys.
Our oldest son (10) is much more likely to get his entertainment from Google's (Nasdaq: GOOG ) YouTube or News Corp.'s (Nasdaq: NWS ) Speed Channel than he is anything Disney offers. He's typical in this regard. A 2008 report from Nielsen Online found that kids aged 2-11 spent 118 minutes per month looking at online video. YouTube was by far their preferred streaming source; DisneyChannel.com was a distant second. Disney needs Marvel to attract more of the male subset of this YouTube Generation.
Fortunately, help is on the way. Reactions to the latest trailer for Iron Man 2 suggest a massive opening weekend and perhaps another $300 million box office. If that does come to pass, it will be in no small part due to preteen and teen boys spending to see Robert Downey Jr. and Mickey Rourke swap punches on the big screen. Iron Man 2 opens May 7 nationwide.
The bear argument
If there's a problem with Disney, it's with the valuation. The smart Fools at our Motley Fool Inside Value service still recommend the stock, but they also say, at these levels, the company is fairly valued. New investors shouldn't expect much in the way of immediate upside.
By the numbers, my friends at Inside Value are absolutely right. Capital IQ shows Disney trading for 17 times this year's average earnings estimate, which calls for roughly 9% year-over-year growth. Put in context, this means Disney is more expensive than go-go growers such as Green Mountain Coffee Roasters (Nasdaq: GMCR ) , which trades for a fraction of the 80% earnings growth analysts expect this year, and Celgene (Nasdaq: CELG ) , which is priced about in line with the Street's 2010 projections.
Disney's also worth $65 billion in market cap, which puts it at a severe disadvantage, according to one of my Favorite Fools, HollywoodDan. Here's his bearish pitch from early February:
At best, the big guys match the market. You don't grow by paying $11 billion for companies and then trusting that your giant machine can maximize the profits on all the creativity. Far more likely they get nibbled at little by little as generations wake up and realize ESPN and Disneyland are bastions of retardation. Behemoths are logically not likely to prosper in an age that demands speed.
That's a fair point. Over the long term, small caps tend to beat large caps, and large caps don't come much bigger than Disney.
Recommendation: Buy to hold
Disney isn't likely to make much of a move in the short term. Sure, Iron Man 2 looks like a nice catalyst, but it's also a small piece of a very big puzzle in which theme parks and TV networks account for close to 75% of revenue.
Still, Disney is about as stable a media stock as you'll find, and pays a decent if below market 1% dividend yield. Today's buyers should reinvest those payouts over the long term, counting the incremental gains in license revenue and return on capital from the Marvel theft ... I mean, purchase ... as a welcome bonus.
Would you buy Disney at current prices? Discuss in the comments box below.