Cheap Buy or Goofy?

With shares of Walt Disney (DIS ) sliding from a high of 43 in 2000 to 16, investors haven't been whistling a happy tune for a while. The recession, looming war with Iraq, and the threat of terrorist attacks have slowed traffic and sales at Disney's theme parks, resorts, and stores. And its ABC television network remains saddled with problems.

So why are some value players snapping up Disney shares? "Disney represents a portfolio of blue-chip entertainment assets selling at bowling alley prices," says Scott Kuensell, managing director of Brandywine Asset Management, which is buying shares. The assets include Disney film studios, which could have an Oscar winner in Chicago, and TV channel ESPN. Disney's stock, he says, is selling at a price-to-book of 1.5 times, vs. a five-year norm of 3 times. And on a price-to-sales basis, the stock sells at 1.3 times, vs. a five-year norm of 2.5 times. Kuensell figures the stock will double in the next 24 months. True, earnings have been flat over the past five years, but Disney's operating cash flow, he notes, has risen at a yearly growth rate of 16% since 1996, and it generated free cash flow (cash flow minus capital expenditures) of $1.2 billion in 2002. Despite rumors to the contrary, Kuensell believes CEO Michael Eisner will stay to achieve a turnaround by "squeezing maximum financial returns from Disney's powerful brands." Although many analysts have cut their earnings estimates, Kuensell sees earnings rising to 90 cents a share in 2004--two pennies higher than the Thomson First Call consensus--from an estimated 70 cents in 2003, a penny above the consensus. Value Line analyst Damon Churchwell says Disney's low price gives it sharp upside potential for the long term.

By Gene G. Marcial

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