Disney (DIS) Looks Very Cheap -Barron's

The cover story in this weekends edition of Barron's -- "The Magic's Back" -- discussed reasons why Wall Street may be undervaluing the potential housed in media giant Disney (NYSE: DIS).

The article begins by pointing out to Barron's readers just how undervalued Disney currently appears: the stock is trading at about 14.4x FY08 EPS estimates, a level that Disney's stock has not seen since 1990. Furthermore, Disney's most recent forward P/E has it trading in-line with the S&P 500, a valuation that seems absurd considering that over the last 20 years, Disney's median premium has been about 30% compared to the broader market.

Barron's believes that despite conflicting Street valuations, Disney is actually a "more diversified better-managed, less cyclical and more disciplined in its brand development and capital-allocation strategies" than the market is currently pricing in.

Many investor concerns focus on Disney's ability to continue delivering strong earnings in a tightening consumer spending environment. Barron's believes that investors are speculating that an economic downturn will drastically impact Disney's results because its earnings rely heavily on theme park attendance, but these assumptions are simply not true. Last year, Disney's media networks segment actually made up the largest percentage of its revenues -- about 42%. Parks/resorts made up about 30% of revenues, studio entertainment made up 21%, while consumer products made up about 7%.

Cited in the article, one analyst at Morgan Stanley valued Disney's top media network, ESPN, at about 40% of the Company's value and when combined with revenues from the Disney Channel, these two networks actually made up twice the value of Disney World, Disneyland, Euro Disney, and Hong Kong Disney combined.

Going on, Barron's next addresses another inaccurate idea that may have investors capitulating about the legendary Disney name: its earnings are heavily tied to advertising. Barron's believes that the Street has priced in too much risk related cyclical exposure, as Disney currently gets only about 22% of its revenues from advertising, a business that is heavily tied to a strong economy. For Disney's ESPN network, about 65% of its revenues come from "affiliate fees", while only 35% comes from advertising. Furthermore, the Disney Channel does not take advertising and ABC "while certainly challenged by a tough broadcast environment, only makes up about 9% of Disney's cash flows."

Shares of Disney initially gapped higher due to the positive Barron's article, rising to around $33, but have since sold-off despite broader market indicies that rallied into the afternoon trading session.