Two Must-Own Household Names

06/04/2008 12:00 am EST

Focus: STOCKS

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Stephen Biggar, Standard & Poor’s global director of equity research, says two of the bluest blue chips are doing well in the current environment and look like good buys.

Disney’s (NYSE: DIS) fiscal 2008 first-quarter results show a continued resilience to a US economic slowdown in domestic theme parks and resorts. Attendance at both Disney World and Disneyland has stayed ahead of last year’s record pace.

We also note continued healthy trends at the media networks businesses, with more international licensing of ABC's prime-time hits, a healthy TV ad market, and ESPN brand extensions. We see newer Disney Channel franchises (like Hannah Montana and High School Musical) fueling the consumer products unit, and we are encouraged by a newly unveiled slate of ten animated films (from Disney and Pixar) through 2010.

We expect Disney’s revenues to advance nearly 8% in fiscal 2008 and 6% in fiscal 2009 to reach about $40.6 billion. A sizable margin expansion should reflect reduced cost pressures at the theme parks, as well as the benefits of a studio restructuring. We forecast earnings of $2.35 a share in fiscal 2008 and $2.59 in fiscal 2009.

In our view, Disney’s balance sheet and strong investment-grade credit provide ample financial flexibility to sustain a somewhat aggressive pace of share buybacks, as well as selective acquisitions and a modest annual dividend payout. Our 12-month target price of $45 (the stock closed above $33 Tuesday—Editor) blends our discounted cash flow model with our sum-of-the parts valuation analysis.

We [also] reiterated our strong Buy recommendation on Procter & Gamble (NYSE: PG) after the household-products company reported March-quarter earnings of 82 cents a share vs. 74 cents a year ago.

Results benefited from strength in grooming, health care, snacks, coffee, pet care, and baby and family care, offsetting lower-than-expected results in the beauty segment. We maintained our fiscal 2008 (ending June) earnings estimate of $3.49 a share and our fiscal 2009 estimate of $3.90.

We anticipate that PG will deliver consistent sales and earnings growth at the high end of its peer group over the next several years. The consumption of household and personal care products is on the rise in developing markets, and we think PG is likely to capture much of the growth, given its vast distribution network of stores and its broad portfolio of brands and products.

The acquisition of Gillette in October 2005 should raise profit margins and cash-flow generation and be accretive to [future] earnings. The 2006 launch of the Fusion razor should help sustain the company’s razor/blade business.

With strong product innovation programs likely to bolster basic household and personal care product demand and ongoing cost-savings programs in place, we believe that the company’s long-term goals of 4% to 6% sales growth [and] double-digit operating earnings growth are attainable.

Our 12-month target price of $80 (the stock closed above $65 Tuesday—Editor) assumes that the shares will trade at 20.5x our fiscal 2009 earnings estimate, a moderate discount to historical levels.  

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