Spying a Bargain at the Mouse House

For some value investors, Disney's depressed shares now look too good to pass up. Just ask Charles Lemonides of M&R Capital Management

By Gene Marcial

What's up, Walt? These days, it seems everything is down for entertainment giant Disney (DIS ) -- on Wall Street and on Main Street. It's one of the many businesses that have suffered greatly in the aftermath of the Sept. 11 terrorists attacks. Analysts have slashed their earnings estimates for the September quarter and the fiscal year to reflect the impact of the now-delayed recovery in TV advertising spending and reduced vacation travel.

Analyst Sobani Warner of Williams Capital Group has cut September-quarter earnings forecast to 8 cents a share from 15 cents, and the estimate for earnings before interest, taxes, depreciation, and amortization (EBITDA) to $776 million from a previous $1.1 billion. The analyst's fiscal 2002 forecast (ending Sept. 30) was reduced to 73 cents (flat with the prior year), and EBITDA was sliced to $4.8 billion, down from a previous $5.5 billion estimate.

Since last month's horrendous events, Disney shares have crashed from 24 to 15 on Sept. 20. They've inched back up to close on Oct. 1 at 18.29 -- still, way down from the 52-week high of 41 touched almost a year ago.


  Will the Mouse House -- which includes the famous Disney theme parks, the ABC television network, movie studios, TV programs, musical recordings, and books -- be able to weather this storm of pessimism and fear as a result of fright over terrorists attacks? Doing a headcount on Disney bulls doesn't take long these days.

Among the big investors who have dumped huge holdings in Disney are Texas billionaires Sid and Lee Bass, who in recent weeks had slashed their stake to 2.9%, down from 9%, which they had accumulated in the early 1980s. The Basses sold some $2 billion worth of Disney stock, or about 135 million shares, at about 15 a share. The reason: They had to cover some major margin calls resulting from losses on their Disney and other investments. Disney itself repurchased 50 million of the Basses' shares.

But not everybody has turned against Mickey & Co. Some savvy value investors have rediscovered Disney because of the values in the company that they say have emerged relative to the now-depressed stock price.


 One of them is Charles Lemonides, managing partner at M&R Capital Management, who has been accumulating Disney at current price levels. "As a true value investor, we look at the intrinsic worth of a company's assets and then compare them to the going price of the stock," says Lemonides.

On a sum-of-the-parts valuation basis, Disney's total worth comes up to nearly $80 billion, or close to 40 a share, figures Lemonides. "There's a heck of a lot of value in Disney, and we're willing to buy the stock at these fire-sale prices," he says. Pretty soon, he adds, the market will snap out of its lethargy, and such value stocks as Disney will come bouncing back with a fury. "So we are willing to be patient," says Lemonides.

Here's how he breaks down Disney's assets for their intrinsic worth:

Media operations, including the ABC network, which produces revenues of some $10 billion and generates cash flow of $2.5 billion, are estimated to be worth $30 billion, based on a multiple of 13 times cash flow, or 15 a share.

Theme parks, which account for $7 billion in sales, produce operating income of $1.6 billion. At 15 times operating income -- or 3.5 times revenues -- their value comes to $24 billion, or 12 a share.

Studios have had mediocre results, says Lemonides, producing $6 billion in sales. At 2.5 times sales, the studios are worth $15 billion, or 7.50 a share.

Retail stores and licensing business, generate sales of $2.5 billion and operating income of some $500 million. They're worth $5 billion, or $2.50 a share, based on 11 times operating income, according to Lemonides.

The Internet and other miscellaneous assets are worth an additional $5 billion, or $2.50 a share, he says.

The grand total in assets of $79 billion, or 39.50 a share, is obviously far greater than Disney current, Lemonides emphasizes. He notes that the cash flow and revenue figures that he uses in valuing the assets are depressed: When earnings turn around with the economic recovery, these figures will necessarily go up, and so will the stock, argues Leomonides. That makes Disney, he says, one of the biggest bargains in the market right now.

"If you can pierce through the heavy atmosphere of gloom and fear, you'll see Disney's value very clearly," says Lemonides. He thinks plenty of other such value stocks are around, adding that "this is definitely the time to value shop at fire-sale prices." Maybe there's some pixie dust left in the Magic Kingdom after all.

Marcial is BusinessWeek's Inside Wall Street columnist

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