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A fresh start for Disney
Disney is beginning this fiscal year with new leadership and a cheap stock.
November 22, 2005: 10:24 AM EST
By Michael Sivy, CNN/Money contributing columnist
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NEW YORK (CNN/Money) - Although Disney recently reported earnings that were better than expected for the quarter and fiscal year that just ended, investors were still disappointed, and uncertain about the company's longer-term prospects.

Some analysts, however, think that Disney's above-average prospects have been obscured. And they rate the stock a buy at its current mildly depressed price.

Part of the confusion comes from new accounting requirements for stock options, as well as other one-time adjustments that Disney had to make to earnings for the fourth fiscal quarter that ended Oct. 1.

Net income for the quarter was down 26 percent because of those adjustments. Trouble is, it's not really possible to figure out what a fair year-to-year comparison would be.

Results were a penny a share above analysts' consensus estimate, so it's not as though the quarterly figures were unexpected.

Moreover, for the full fiscal year, Disney's reported earnings per share were up 9 percent. Adjusting for all but stock options, results were up 11 percent, and adjusting for everything, the gain was 18 percent.

While there's room to debate which adjustments should be counted, it's fairly clear that the company is growing at a double-digit rate. Why then did the stock sell off after its earnings report, especially if analysts had anticipated the non-recurring expenses?

One reason is that the movie studio posted a loss, partly because of weak home-video sales. The slack was largely picked up by broadcasting division ABC. And there are questions how long Disney's recent hits, such as "Desperate Housewives," can power outsize gains in broadcasting.

Analysts also noted that free cash flow was down half a billion dollars, chiefly because of investments in parks, resorts and other property.

There may be some legitimate uncertainty about when Disney will again show robust growth, something that hasn't been seen for more than five years. But if you fairly assess the company's long-term strengths, the current valuation seems too low.

Disney's (Research) share price, in fact, is down 16 percent, or more than $4 a share, from where it was last February.

The case for Disney

As the company begins a new fiscal year, the first thing to note is that Disney has new leadership. Former ABC chairman Robert Iger took over as CEO, replacing Michael Eisner as of Sept. 30.

In addition, former Miramax co-chairmen Bob and Harvey Weinstein completed their separation from Disney.

The bottom line is that Iger will be able to assess Disney's assets with a fresh eye and try to restore the kind of growth rate that used to give the stock a premium price/earnings ratio.

The film division appears to be off to a solid start in the new fiscal year, with "Chicken Little" about to break through the $100 million mark and "Chronicles of Narnia" on the way.

And the other divisions remain on track to help the company turn in double-digit earnings gains for the current year.

Some of the growth is not expected to kick in until the second half. So analysts are projecting an 11 percent gain for this fiscal year and a 13.5 percent gain for next year.

Over the next five years, earnings are projected to increase at a 13 percent rate or better. In addition, the stock pays a 1 percent dividend yield.

At just over $25 a share, Disney trades at about 17 times earnings for the fiscal year that has just begun and 15 times projected results for the following year. That looks attractive, even if it takes a quarter of two for earnings momentum to get up to speed.

Sivy on Stocks resources:

Sivy 70: America's best stocks

Guide to Growth


Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Tuesday.  Top of page

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