Top Pick Picks Pixar

01/27/2006 12:00 am EST

Focus:

Jessica Chiaverini

Associate Editor, The Prudent Speculator

Jessica Chiaverini is a contributing editor for The Prudent Speculator, a newsletter focused on growth and value that has consistently been among the very best performers for more than two decades. Her favorite pick is Disney, which has just picked Pixar.

"With its stated strategy ‘to achieve growth through great creative content, global expansion, and the application of new technology,’ Walt Disney (DIS NYSE) is definitely a top pick for 2006. And with the just-announced $7.4 billion deal to acquire Pixar Animation Studios, the future for Disney looks brighter than ever. In its fiscal fourth quarter report, investors had to drill down to really find the negatives. Media Network's revenue, including both broadcast (ABC TV & ABC Radio) and cable (ESPN & Disney Channel), was excellent, rising 12% year over year.

"The Parks and Resorts division were likewise up 16%. The one real weakness was the Studio Entertainment division, which comprises movie ticket and DVD sales. The market seems to give more weight to this division, out of proportion to the impact it has on the overall bottom line, because of the idea that Disney's movie franchises drive sales in all other parts of the company. All told, Studio Entertainment revenues declined 20% for the quarter and were down 13% for the year.

"But the headline numbers mask some important considerations. First, last year had some very difficult to beat titles including Pirates of the Caribbean, The Lion King Platinum Release, and the mega-hit Finding Nemo. Second, it was really no surprise that the last six to nine months of weak box office results translated directly into weak DVD sales. In our opinion, this had more to do with the winding down of the Miramax controversy than to the long-term health of Disney's movie business.

"And while we were a little disappointed that Disney did not expect the DVD sales trend to turn around until the second half of next year,  Disney still has a lot to be excited about. Pixar is an excellent strategic fit, which should greatly bolster the animation unit. Similarly, opportunities abound to leverage the Pixar film characters across theme park rides, TV, and merchandising. But even before the Pixar buyout announcement, momentum at Disney had started to build. This summer brings both Pirates of the Caribbean 2 and the next Pixar movie Cars to the big screen.

"Video games and a wireless service are also new focuses as the company has been one of the first to embrace the digital distribution of content, evidenced by the deal with Apple to distribute episodes of shows like Lost and Desperate Housewives. Finally, Disney, which never releases park attendance figures, noted that the new Hong Kong theme park has been ‘very, very strong.’ The stock is also attractive from a valuation standpoint, trading at 19.9 times earnings and 17.4 times next year's earnings, 1.6 times revenue, and 1.9 times book value. We remain buyers of DIS up to $25.48 with our liquidity and fundamental goal prices of $51 and $41, respectively."

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