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Of Mouse and Yen

Disney's Still a 'Do,' but Is Japan Worth a Look Now?


The Times today continues a new feature, Stock Exchange, with staff writers James Peltz and Michael Hiltzik debating the merits of individual stocks and other investments.

Walt Disney (DIS)

Disney close Monday: $38.56

Mike: Our first stock this week is Walt Disney Co. I'd like to make full disclosure before we start, Jim: I saw Disney's "Armageddon" the other day, and I hated every second of it. I don't think I've seen a stupider movie since, well, "Independence Day." But I'd buy the stock anyway.

Jim: What a country. You can hate what a company sells and still like its stock. I like the shares too, even though Disney's having a so-so year. But first remind everyone that there's much more to Mickey & Co. than movies.

Mike: There's Disneyland and Walt Disney World, of course, and its interests in Tokyo Disneyland and EuroDisney in France. It owns the ABC television network and a bunch of cable channels, including ESPN, the most profitable television network in the country. Then there're the Angels and Mighty Ducks sports teams in Anaheim.

Jim: The stock, which just split 3-for-1 and now trades in the high 30s, has been a home run for years, ever since CEO Michael Eisner took over in 1984. Under his reign, Disney's stock has run up about 3,000%, or roughly 28% a year on average.

Mike: Here's why: Walt Disney is one of the most efficiently integrated entertainment companies on the planet. All the other entertainment conglomerates talk about "synergy," but Disney is the only company that actually does it. When a company like Time Warner tries to get its publishing and its broadcasting operations working together, you end up with fiascoes like the recent CNN-Time magazine nerve-gas story, which the company has had to retract.

Jim: No retractions for "Mulan" yet, I take it?

Mike: When Disney does synergy, you'll get "Mulan" the movie in the theaters, "Mulan" bric-a-brac in the Disney retail stores, "Mulan" the parade at Disneyland and Disney World . . . .

Jim: Don't forget "The Making of 'Mulan' " on the Disney Channel.

Mike: . . . Sure, and "Mulan" the video series for rent and sale at your local video store, and, finally, "Mulan" on "The Wonderful World of Disney" on ABC-TV a year or two from now. Have I missed anything? The "Mulan" kick boxing championships on ESPN, perhaps?

Jim: And that's a brand-new property. We haven't even mentioned Disney's invaluable library of movies and other features that they keep trotting out and exploiting over and over. It's like an annuity for them.

Mike: They know how to squeeze "synergy" until it screams for mercy.

Jim: The funny thing is, you can find dents in Disney's armor, but not enough to bad-mouth the stock. Like right now. Disney's earnings growth is pulling up, ABC's ratings suck, and some of its movies, like "Armageddon" and "The Horse Whisperer," aren't the blockbusters some expected.

Mike: Right. This year there's been a rare occurrence--almost every part of Disney has been under-performing. Back in June, five major investment firms on the same day cut their estimates on Disney's earnings for 1998 and 1999. The stock fell more than 6% the next couple of days. But guess what? Since then, it's risen nearly 13%.

Jim: That's because, even when things get soft, Disney keeps coining money. It's still expected to throw off some $2 billion of excess cash over the next year or two, which it could use to buy back shares, hike the dividend or buy someone else. That drives the stock, which, by the way, trades at a rich 33 times next year's earnings even though Disney's results have lost a cylinder.

Mike: They squeeze every drop of revenue and profit that you can squeeze out of every single property. Plus, Disney is full of control freaks who try to keep a tight leash on spending.

Jim: They must have been at lunch when "Armageddon" got made for $140 million. Anyway, how big a problem is ABC?

Mike: Network TV is a classic industry in which every dog has its day, because nobody knows enough to have a permanent lock on audience sentiment. NBC is riding high now, but sooner or later ABC or CBS will pick up the slack, and everyone will write stories about how amazing it is that the network that was in the toilet a year ago is now thumping its competitors.

Jim: I also wonder, though, about Disney's management over the long haul. Let's face it: Eisner makes this company go, and he doesn't have a clear successor. Although he's only 56, he had heart bypass surgery three years ago.

Mike: He's the ultimate control freak, and he's had a lot of trouble keeping subordinates happy--and keeping subordinates, period. It's an obvious concern, and it's something that's been raised by investors over the years. But it's ebbed for now because Eisner seems healthy and Disney's prospects look good.

Jim: Fair enough. Two buys for the Mouse.


Nikkei close Friday: 16,570.78

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