Out of the Doldrums at Disney, Part 2

Two of the company's top executives talk strategy and discuss the lessons the company has learned.
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Continued from Part 1

It will take years to figure out whether American kids are really growing up faster, and how that change affects Disney. If the company's brand is as strong as Murphy and Staggs believe, there's little doubt that Disney stock is now a screaming buy.

Measured on a price-to-earnings and price-to-cash-flow basis, the company is trading at historic lows relative to its entertainment industry peers, none of which has the worldwide name recognition or management strength that Disney enjoys. (Disney has lost lots of executives to Internet start-ups recently, but that's partially a reflection of the depth of its talent pool. Murphy, who personally recruits at the top business schools, claims the company "gets the cream of the crop" for the half-dozen or so MBAs it hires each year.)

But even if the skeptics are right and Disney's brand has weakened substantially, the stock may still be cheap. After all, even without

Mickey Mouse

and

Donald Duck

, Disney has a portfolio of assets as strong as any entertainment company, including the planned union of

Viacom

(VIA) - Get Report

and

CBS

(CBS) - Get Report

. The crown jewels include

ESPN

and the company's theme parks. There's also a little-known portfolio of radio stations that would be worth several billion dollars as a stand-alone company, and cable channels including

Lifetime

and

The History Channel

.

Though live-action film is a crummy business, Disney plays it as well as anyone, and the company's film studio has easily won the U.S. box-office crown this year. And don't forget

ABC

, which despite its struggles reaches hundreds of millions of viewers every week. Finally, Disney is the only major old media company with a real Internet strategy. While the company's

go.com

portal has gotten little respect from either investors or Web types, there's little substantive difference between it and other portals, including Web leader

Yahoo!

(YHOO)

.

Together, those assets are expected to produce close to $5 billion in earnings before interest, taxes, depreciation and amortization in 2000, about as much as the Viacom/CBS combination. (Analysts commonly use EBITDA, or cash flow, to measure media companies, since many of them have little in the way of net income.) Yet Disney has a total enterprise value, including debt, of around $65 billion, while the Viacom/CBS combination will be worth more like $90 billion, including the value of publicly owned shares in CBS's

Infinity Broadcasting

(INF) - Get Report

subsidiary.

Another sign of Disney's strength: Despite its recent earnings weakness, analysts still expect it to have about $1.4 billion in net income in 2000, more than any other entertainment company. In fact, that's more in bottom-line income than

Fox

(FOX) - Get Report

, an erstwhile Disney competitor, is expected to have in

cash flow

next year. (Fox parent

News Corp.

(NWS) - Get Report

owns a minority stake in

TheStreet.com Inc.

(TSCM)

, the publisher of this Web site, and Fox's

Fox News Channel

televises "TheStreet.com" program.)

Continue to Part 3