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Mouse trap?
Eisner's role has been diminished. But if you think that makes Disney stock a buy, think again.
March 4, 2004: 3:49 PM EST
By Paul R. La Monica, CNN/Money senior writer

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NEW YORK (CNN/Money) - Michael Eisner is no longer the Big Cheese at the House of the Mouse, news that seemed to please Wall Street Thursday.

But does the shakeup at the top -- or any changes that may follow -- make the stock a buy?

Disney (DIS: up $0.12 to $26.77, Research, Estimates) shares rose about 1 percent Thursday, the day after Eisner was stripped of the post of chairman following a revolt by shareholders at the company's annual meeting. Disney director and former Senator George Mitchell was tapped by the board to replace Eisner as chairman, though Eisner held on to the post of chief executive officer.

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The board acted after owners of 43 percent of the shares voted at the meeting withheld their votes for Eisner's re-election to the board. Eisner will also stay on the board, since he was running unopposed.

Despite the vote of no-confidence in Eisner, Disney shareholders appear to have little to be upset about this year. The stock has jumped more than 15 percent year-to-date and, at around $27, was about 5 percent below its 52-week high in Thursday trading.

Pushing 30

But shareholders were upset about the performance of Disney's stock over the last decade -- when it's lagged the broader market as well as the shares of rival media companies.

And the Magic Kingdom has yet to get to the magic price of $30 -- which many people said was fair value for the company after cable operator Comcast announced an unsolicited takeover bid last month. Disney shares have not traded above $30 since June 2001.

So what's next for Disney's stock? Is $30 something fit for Tomorrowland or Fantasyland?

"We have felt for a long time that the stock is worth $30 or better and continue to think that," said Angela Kohler, a media analyst with Federated Investors, a mutual fund firm that owns shares of Disney.

On the surface, Eisner's slightly diminished stature should be a plus for shareholders. (It would be nice to know what Jeffrey Katzenberg, the former Disney exec whom Eisner once called a "little midget," thinks of this saga). Investors made their voice heard and the company responded quickly. But was the move really enough to cause more than just a slight pop in the stock price?

"I don't really think things have changed that much. Eisner is still there and the Street perceives Mitchell as very much tied to Eisner," said Peter Mirsky, an analyst with Oppenheimer.

Is Disney's turnaround for real?

Setting the boardroom drama aside for a minute, investors really should focus on two major issues: Disney's valuation and its fundamentals.

In some respects, Disney's stock looks reasonably valued. Shares trade at about 28 times fiscal 2004 earnings estimates. That's a slight premium to media rival Viacom, which trades at 25 times estimates. But it's a bit of a discount to News Corp., and to CNN/Money parent company Time Warner, which have P/Es of 33 and 30, respectively.

Too much for the Mouse?
Disney has had a nice run this year...so it might not be the best value in media.
CompanyP/E*Price/Free Cash FlowEnterprise Value/EBITDA
Walt Disney27.834.314.4
News Corp33.044.615.5
Viacom24.726.513.9
Time Warner30.320.210.7
* based on fiscal 2004 estimates
Source:Thomson/Baseline

But Disney trades at a premium to Viacom and Time Warner on two other key measures analysts use to value media stocks: price to free cash flow and enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA). Enterprise value is a company's market value plus its net debt.

Jeffrey Thomison, an analyst with Hilliard Lyons, said the stock is "fairly attractive" but following the run-up after Comcast announced its bid, he's cooled a bit on the stock's near-term prospects.

"Investors that own it should not sell it," said Thomison. "But those that want to buy should be looking for it about $24," or about 10 percent below current levels.

Disney's business outlook is also a bit cloudy right now, despite some notable improvements last year. "Disney has seen a turn in their businesses but if you look out beyond this year, things get a lot more difficult," said Oppenheimer's Mirsky.

Assuming Disney remains independent, Mirksy said, it'll have a tough time convincing Comcast, the nation's biggest cable operator, to fork over big rate increases to carry Disney's ESPN sports network. Disney recently agreed to accept much lower annual increases from cable companies Cox and Charter.

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In addition, Mirsky said Disney's movie business will face tough comparisons this year after last year's blockbusters "Pirates of the Caribbean: The Curse of the Black Pearl" and "Finding Nemo."

Still, it's not all doom and gloom for Disney.

Federated's Kohler thinks the company's theme parks should have a much better year as the economy continues to improve. Disney's theme parks accounted for nearly a fifth of the company's total sales and operating income in its most recent quarter.

Other media stocks more attractive

Disney should also benefit from an improving economy since that should boost advertising, and Disney is a media company, after all.

But Disney probably isn't the most attractive media company at the moment, Kohler said, adding News Corp. and Viacom, which Federated also owns, are better bets due to stronger growth prospects. Mirsky likes News Corp. and Time Warner more than Disney for similar reasons.

Plus, Disney has some risks that the other media companies don't. If Comcast drops its bid -- and so far it's given no indication it will raise its offer -- that could pressure Disney shares. And despite Wednesday's moves, the Eisner distractions are far from over.

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Dissident shareholders and former board members Stanley Gold and Roy Disney called for Eisner to leave the company at Wednesday's shareholder meeting, and Calpers, the nation's largest pension fund, echoed the call after the meeting.

"The events of Wednesday had to please the anti-Eisner crowd somewhat, but not fully," said Hilliard's Thomison.

So until the Eisner soap opera comes to a close, the stock could wind up on a stomach-churning ride that would make Space Mountain look tame.

The author of this column owns Time Warner stock through his company's 401(k) plan. Time Warner Inc. is the parent company of CNN/Money.


Hilliard Lyons' Thomison owns Disney shares but his firm has no investment banking relationship with the company or others mentioned in this article. Oppenheimer's Mirsky does not own shares of any of the companies mentioned and his firm has no investment banking ties to them.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.