Unscrambling Monday's Egg

Unscrambling Disney (NYSE: DIS)

Putting Disney through the Chicks' Dozen
by Chick Cheryl

NOTE: Chick Cheryl is finishing up the month of July by focusing on two more companies from her home state of California... Disney and Apple. Stay tuned for Wednesday when we start a whole new series for August!

1. Buy What You Know  For my kids, mouse ears, the Matterhorn and Mr. Toad's Wild Ride definitely mean Disney. For my husband, television networks ABC and ESPN might come to mind. Being an avid moviegoer, Walt Disney Pictures ("The Lion King") and Touchstone Pictures ("Pretty Woman") come to mind

2. Keep It Simple Sister (KISS)  I'll try... as massive as Disney has become, we can break their operations down into five different business segments: Media Networks (eg. ABC television and radio, ESPN, Disney Channel, SoapNet, and major stakes in A&E, Lifetime and E! among others), Studio Entertainment (eg. Material produced and broadcast by Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures, Miramax Film Corp. and the production and distribution of compact discs, audiocassettes and records including all their film soundtracks and read-along projects for kids.), Parks & Resorts (eg. Disneyland alongside the newly opened California Adventure, Walt Disney World Resort which includes the Magic Kingdom, Epcot, Disney-MGM studios and Disney's Animal Kingdom. The Disney Cruise Line, Tokyo Disneyland, The Magic Kingdom in Paris, the NHL franchise, the Mighty Ducks of Anaheim, and a stake in the Major League Baseball franchise, the Anaheim Angels.), Consumer Products (eg. The licensing of the Company's characters and other intellectual properties, books and magazines, character merchandise and other Disney-related products sold directly through its retail facilities under "The Disney Store" name.), Walt Disney Internet Group (eg. develops, publishes and distributes content for online services and also operates The Disney Catalog which markets merchandise through the direct mail channel.). Phew.

3. Industry  If I were to take a guess, I would have said that Disney's industry would have been something like media or entertainment conglomerate. Like another Chick holding, General Electric, this company has its hands in a lot of things, but all entertainment related. Their industry is actually listed as Recreation Activities. Hmmm, I guess that works too.

4. Leader In Its Field  For name value, I'd say this company wins hands down. When asked to name a theme park, the majority would probably name Disneyland (or Disney World). As far as actual size, it's a tough call. The media world seems to be changing rapidly through acquisitions and mergers. Disney and AOL Time Warner definitely hold the top spots with Viacom not too far behind.

5. Repeat Profitability  This company has so many different places where they can profit over and over from me that it makes my head spin! Yes, I see their movies and rent their movies. My kids buy their movies and watch them so many times I memorize their movies! A trip to the Disney store never ends with my walking out empty handed. We live so darn close to Disneyland that repeat trips are inevitable. Truth be told, its one of my favorite places to go too! It can't help but bring out the kid in you. I don't think Disney's most recent release "Pearl Harbor" showed quite as much repeat profitability as they'd hoped. However, not every movie can score with "Titanic" proportions!

The following numbers were taken from Disney's quarterly balance sheet and income statement. Go check it out for yourself!

6. Gross Margin

(Sales - Cost of Goods Sold) / Sales

(6049 - 5133) / 6049 =

916 / 6049 = .15

.15 x 100 = 15%

This just doesn't make it to our stringent 50% criterion.

7. Net Margin

Net Income / Sales

-567 / 6049 = -9.4%

Ouch! Does Mickey have a whole in his pocket? Because he's certainly losing money! That's not even close to the Chick's desired 8%.

8. Cash vs. Long Term Debt

Cash* / Long Term Debt

663 / 9661 = .07

*cash, including marketable securities

So much for saving for a rainy day, if a storm comes, Disney's going to have to run under somebody else's umbrella for help! Chicks want their companies to have lots of cash... didn't your mother always tell you to keep a six month emergency fund? Same idea!

9. Flow Ratio

(Current Assets - Cash*) / (Current Liabilities - Short Term Debt)

(8111 - 663) / (5904 - 0) =

7448 / 5904 = 1.26

*cash, including marketable securities

Yeah, a number that fits into the Chicks Dozen at last! Remember, we Chicks want this number to fall below 1.5.

10. Increasing Growth

(most recent quarter sales - last quarter sales) / last quarter sales = X

X x 100 = %

Sales from Q 3/01 = 6049

Sales from Q 12/00 = 7433

(6049 - 7433) / 7433 =

-1384 / 7433 = -.186

-.186 x 100 = -18.6%

Did they get bombed in Pearl Harbor too? Measuring this quarter against the same quarter last year, we still see a 4% decline in sales. Perhaps the drain has been from the poor opening of their newest theme park, California Adventure. Sales seem to have picked up now that they've dropped their ticket price and revived the Electrical Parade. The company has blamed the weak economy and reduced advertising revenues at its media outlets for its woes. I'm actually amazed that despite poor attendance, the Walt Disney Co. still wants to go ahead with their plans for a 3rd theme park in the same area!

11. Strong Management and History  Walter Disney was one of five children. He began his company in 1923 with the help of his brother Roy O. Disney. In fact, Walt always said his dreams would never have come to fruition without the strong business mind of his brother Roy. After Walt's death in 1966, it was Roy who saw through the completion of Disneyland and later, Disney World.

Roy's son, Roy E. Disney, has kept the family name in the business. He has worn many hats during his tenure with the company, holding the position of Vice Chairman of the board since 1984 and the head of the animation division since 1985. He is 70 years old. Currently, the man sporting the biggest mouse ears is 58-year-old CEO and Chairman, Michael Eisner. In the last decade, the company has experienced numerous changes, musical chairs among the executives among them. When super agent Michael Ovitz left his short-lived post as President and COO in 1996, studio chief, Joe Roth departed as well. This, following the major acquisition of ABC, Capital Cities was a lot for Disney and its shareholders to handle. The stock price suffered and Eisner was pressured to find a strong candidate to fill the vacant number two seat. Forty-nine year old, Robert Iger, fit the bill. (Did you know that Iger is married to former model and spokesperson, Willow Bay? She's become quite a Chick herself, hosting her own Money show.) He was a long time employee of ABC, having had increasingly responsible positions at ABC since 1974 serving as President and COO from 1994 to 1999.

12. Buy On Sale
52 week high = 42.81
52 week low = 26
52 week average = 34.41
Current Stock Price (as of 7/27/01) = 27.03

Once again, the blue light is flashing over here in the Disney aisle! Their stock is barely trading above their 52 week low. Gee, do ya think investors are a tad skittish about investing in a company who has a negative net income? Well, this Chick isn't too worried about the Mouse, as long as there are kids in this world, there will always be a Disney customer!