Not a Mickey Mouse Company

12/20/2007 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Strategic Advantage, says Disney has some real strengths that could limit its stock’s downside if the consumer pulls in his horns even more.

One of the few stocks that really hasn't been very volatile at all this year is Walt Disney Co. (NYSE: DIS). It also hasn't offered much in the way of upside either, unfortunately, putting in a disappointing 3.5% loss so far here in 2007.

The key element that I have always liked about Disney is that it has always focused on creating first-rate content. The old Disney characters' brands continue to be one of the most popular in the world, and most of the company's new ventures and efforts, including its ABC television network and ESPN sports network, will keep it at the forefront of American industry for a long time.

The ESPN brand, in particular, really is the "worldwide leader in sports," just as the slogan claims, as it has managed to become credible in college and professional football, basketball and baseball, as well as oddball loose ends like poker. It has also spun off additional channels and restaurants, and has created a great website. Really, you could not ask for more.

And although Disney's film division struggled for a while, the purchase in 2006 of Pixar for $7.4 billion has filled that void. The company got Pixar superstar director John Lasseter in the deal, and he has returned the studio to its former glory in animation. He has also spearheaded efforts to distribute Disney content through digital channels, making the company's films and TV shows the first to be sold to the iPod generation via the iTunes platform.

On the executive front, the company bumbled around in the latter years of the Michael Eisner era, but it has been rejuvenated under the guidance of new top dog Robert Iger. He was the right man for the job, groomed internally, and has won a lot of fans on Wall Street with a reputation for integrity, showmanship and hard work.

The problem is that despite all of its good deeds, growth at the company is pretty modest—with revenues up only around 5% to 7%, or not much of a premium over the pace of the US economy. Margins are improving ever so slightly, but the company remains tied to consumer strength, and that's not such a good thing these days.

Movie-making remains a very up-and-down business, and the TV business, despite its strengths, is an ad-driven medium that is subject to weakness as companies husband cash by cooling their marketing budgets.

If there is a short list of large-cap industrial companies that should survive any potential economic downturns with grace, Disney would be on it. I still think it can get back to the low $40s over the next couple of years, but the stock could remain flat to modestly weaker for six months to a year before getting traction. (The stock closed above $32 Wednesday—Editor.)

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