Out of the Doldrums at Disney

The company's underperformed in recent years, but its shares are so cheap that the upside potential appears vast.
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It looks like it's finally time to buy


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Two bad years have swept away much of the Mouse's arrogance, opening the way for a new attitude toward shareholders and a renewed commitment to the bottom line. In an hour-long exclusive interview with


last week, two of Disney's most senior executives opened up about the company's future plans, highlighting its sometimes forgotten strengths.

The execs, Chief Financial Officer

Thomas Staggs

and Chief Strategic Officer

Peter Murphy

, are two of Chairman

Michael Eisner's

closest lieutenants, part of the Burbank braintrust that directs Disney's 110,000 employees. If and when Eisner ever steps down, either man could become the next head of Disney, which for all its recent troubles remains the world's most important entertainment company and one of its most powerful cultural forces.

For that reason alone, Staggs and Murphy are worth hearing from. But Disney investors, who've watched in pain as the company's stock has plunged 40% in 18 months, have special reason to listen.

Protecting the Brand

The collapse in Disney stock is no accident. It's happened alongside a plunge in earnings, a huge black eye for a company that for most of the last decade grew without a stutter. Since peaking in fiscal 1997 at 92 cents per share, Disney's earnings have slid more than 30%. (Disney's fiscal years end in September.)

Worse, the Mouse's malaise defies easy explanation. The rest of the entertainment industry is strong, and some sectors of Disney's business, including its radio stations and


, are performing well. Disney's problems are concentrated in its "creative content" division, the home of its movies, videos and licensed merchandise. As the Mouse's malaise has lingered, investors have begun to wonder if Disney has somehow lost its connection to American children and whether the company will have to reinvent itself to regain that tie. (


explored this issue

in depth in April. More recently,



The Wall Street Journal

have also chimed in.)

Indeed, evidence abounds that American kids are more fashion-conscious and brand-aware than they've ever been. But Staggs and Murphy insist that Disney's problems are short-term and that the values it stands for -- safety, security, comfort -- are as powerful as ever to both adults and kids.

Investors' Disdain Gets Disney a Discount
Enterprise value to estimated cash flow ratios for media companies

"There's nothing wrong with the brand," Murphy says. "The American consumer has a relationship with Disney that's unlike any other family entertainment brand. ... Frankly, they want us to succeed."

And Staggs says that Disney can still count on the appeal of its animated library, the company's true cash cow, to families everywhere. "The biggest factor in the home video

sales is what titles and how many titles we have in the marketplace in any given year -- that has more to do with supply than it does with demand."

Disney's branded consumer-products division has been another sore spot for the company. But Murphy says the problem isn't that kids won't wear Disney-branded clothes. "Some of our execution has been less than perfect of late," he says. For example, Disney has been behind the curve on recent clothing fads like cargo pants.

But do kids and teenagers really want clothes from Disney instead of

Abercromie & Fitch

(ANF) - Get Report



(GPS) - Get Report

? Murphy says yes. "If you have Mickey Mouse plastered all over it in a gaudy way, then we have a problem. ... But if you have a cargo pant that's trendy but tasteful," it will sell, the executive says.

As proof of the strength of its brand, Disney offers research from an independent consultant that shows that its brand ranks among the strongest worldwide. The study, by

Landor Associates

, measured the attitudes of 40,000 consumers in 27 countries toward 8,500 brands. In country after country, Disney ranked among the top 3% of all brands. In the U.S., it ranked even higher, in the top 0.2% -- which appears to put the company in the top three of the 1,517 brands studied.

Unfortunately for Murphy and Staggs, the evidence isn't quite as conclusive as they'd like to believe. First off, Landor conducted the study in 1997, before Disney's bottom line began to sink. Also, the survey doesn't focus on children, especially children aged 8 to 13, the crucial swing audience for Disney.

Continue to Part 2