Somebody call my agent. I've been miscast as today's Disney (NYSE:DIS) Bear.
As the (relatively) new father of a child just nearing the age at which she can begin to enjoy Disney films, by all rights I should be bullish on this stock. But I'm not, and here's why.
The House of Mouse needs an exterminator
Disney is one of those stocks that gives value investors like yours Fool-ly fits: a conglomerate. With its fingers in the pies of everything from the toy industry to television, from network TV to Hollywood movies, this "diversified entertainment company" has so many moving parts that it's hard to stick an accurate valuation on the whole kit and kaboodle. Monstrous corporate kingdoms like Disney's basically require investors to trust management to do the right thing and reward outside shareholders.
Which should be easy to do, in theory. But what exactly has Disney produced with all its many revenue streams? A stock that trades today for 23% less than it did back in June 1998.
... Which isn't necessarily a bad thing
For new shareholders, at least. Investors who've owned Disney for the bulk of the last decade are not likely card-carrying members of the Mickey Mouse Fan Club anymore. They've been sitting on dead money for almost a decade.
But that's just for "old" shareholders, right? If a stock has declined over an eight-year horizon, surely it's become so cheap that investors who buy it today will reap the rewards as new CEO Bob Iger and crew turn this whirling teacup around?
Don't bet on it.
Just because a stock is priced cheap-er today than it was nearly a decade ago, that doesn't mean it's cheap, period. With just $3.8 billion in free cash flow generated over the last 12 months, Disney currently sports an enterprise value 20 times as large. Although that's a cheaper-looking valuation than the company's trailing P/E of 22, both numbers dwarf the growth rate that analysts predict for Disney's profits: 13% per year for the next five years.
Long story short: with a PEG ratio of 1.7 and an EV/FCF/G (where growth refers to earnings growth) of 1.5, Disney is anything but cheap.
But what about Pixar?
Oh, yes. Pixar. Steven will no doubt tout the Pixar acquisition as one of Disney's crowning glories, and argue that this allegedly fast-growing animation powerhouse will drive Disney's growth to dazzling heights. I disagree. In fact, I'd argue the contrary -- that Disney grossly overpaid to acquire Pixar, and became less valuable in the process.
Consider: Disney paid $7.4 billion to acquire the animation studio. With Pixar reporting $153 million in profits in its last year as a public company, that worked out to a valuation of 48 times earnings. Costly on its face, that price might still turn out to be fair if this newest subdivision in Disney's Magic Kingdom can grow its profits at 50% per year or so.
But judging from the early reports on Pixar's latest offering, Cars, that happy ending may not be Pixar's to provide. Based on its opening-weekend results, Cars already looks destined to earn less than either of Pixar's last two offerings, raking in 50% less than either Finding Nemo or The Incredibles produced domestically, despite movie ticket prices having risen since those films came out.
That suggests to this Fool that Pixar may have peaked at the very moment Disney was signing the check.
Think you're done with the Duel? You're not! Go back and read the other three arguments, then vote for a winner.
Disney is a Motley Fool Stock Advisor pick. You can meet all the other market-beating inhabitants of Tom and David Gardner's magic investing kingdom with a free 30-day guest pass.
Fool contributor Rich Smith has no position, short or long, in any company named above.
