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| Trader Wizard Perspective Daily global capital markets advice "Blog" posted before the NYSE morning bell and throughout the trading day. | ||
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| Who is Trader Wizard? | ||
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| Trader Wizard's Mission
My goal with this Ezine, other than enjoying the challenge of a weekly ‘buy or sell’ recommendation, is to continue the independent investor information, education and facilitation process started with Trader Wizard. | ||
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| Articles by Trader Wizard | ||
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Barron’s Review of TW Week 46 In Review “Unnecessary Trauma” Gold is Not American Gold Prices to Zoom Follow up on TASR TW’s Daily Show: Nov 19 Canadian Stocks Trader Monthly | ||
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Independent Financial Writers GuildJoin Security Traders
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| BUY or SELL Recommendation on Disney | |
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Disney (NYSE: DIS) Nov 26 close: $27.12 RECOMMENDATION: ACCUMULATE Strategy: Write DIS=PE April-05 Puts Strike@25.00 and Bid Price at market close November 26 (DIS=PE @ $0.60) OneChicago Single Stock Futures (DIS1C): DIS1C Z4 (Dec 04) $27.10 Among general reading, here is material I used to make this decision: EasyStock Interactive charts: Monthly, Weekly, Daily, Hourly, 30-Minute Data, the Reuters data at Yahoo Finance, and the Value Line report dated Nov 19. |
| The case for accumulating (the stock): | |
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1. The current stock price reflects three full years of the negative impact on post-9-11 destination tourism, and is fairly priced today, but well positioned for the next three years as the global economy recovers. My EPS, PE and Target Price estimates for DIS are $1.15/25/$28.75 (2004+), $1.33/25/$33.25 (2005), $1.46/25/$36.50 (2006) and $1.61/25/$40.25 (2007). With my accumulation target of $24.40 on DIS (which is the Apr-05 25p strike enhanced by premium income of $0.60), my price targets are $28.75 (+36%) by year-end 2005; $36.50 (+50%) by year-end 2006; and $40.25 (+65%) by year-end 2007. These estimates are based on normal 10 percent earnings growth; however, I foresee DIS, under new management, may also grow via acquisitions, and with share buybacks, plus a growing dividend, would increase these projections somewhat. 2. Profitability fell dramatically after 9-11, but has constantly moved back to the 8.0 percent level for net profit margin. Return on Equity and on Assets, at 7.5% to 9.0% need to get back to 10%. The company has a remarkable brand name, but the image has been tarnished in recent years. New management will have to work on that. 3. The news reporting has been focused on the airing of dirty laundry in court. Disney is a $55 billion large cap corporation with 112,000 employees. Very soon Michael Eisner will not be one of them, not that he has been bad news, but he has not been “good” news. Investors have to overlook the stories and focus on the numbers. 4. The corporation has an A financial strength rating from Value Line. Its Current Ratio (1.0), Quick Ratio i.e., acid test (0.7) Liquidity Ratio i.e., cash (0.18) is satisfactory and has been stable for five straight years, although weakened somewhat after 9-11. The Debt Ratio at 52.4 is satisfactory and compares to IBM at 73.3 and BA at 84.7. Interest coverage is 3.7, is satisfactory. Altman’s Z-score Ratio, which is another solvency test used by market pro’s, is at 2.03, comfortably over the 1.80 test. 5. In a rising interest-rate environment, which I expect now that the election is out of the way, investors should avoid the financially weakest companies, however, Disney is a solid cash business that also turns its receivables 6.5 times annually, which should cause no problems in a rapidly rising interest rate environment. 6. The stock has been hammered down because of 9-11. Two full years operating results were cut in half. As a result, the stock traded mostly higher (than current prices) from 1997 through 9/11/01. I like to be able to buy stock in core holdings like DIS at prices the leading institutions paid for several years in the 1990s. The 9-11 event is history. Terrorism is now much less of a factor. Life has returned to normal. Disney is a diversified company; the cruise ship business and ABC and ESPN operating revenues/profits should now grow by at least 10 to 15 percent annually over the next 3 years. Foreign sales are just 18 percent of revenues, and include terror-safe royalties from Disneyland Paris and Tokyo plus international music and film distribution sales. 7. Short-term technical indicators have now turned bullish, which may take the long-term (monthly data) indicators bullish as well in the next month or two, likely in 1Q05. Technically, DIS is already in a long-term accumulation zone. Beta is 1.30, so broad market weakness is going to have a negative impact on the stock, so I’ll plan for that with my put write. 8. By writing the April 25 put, I may miss the Disney boat if the short-term trend continues north through 1Q05, but I’ll earn the premium, which reduces the cost base on my other DIS stock. If the stock is put to me in the next 4 months, my cost is just $24.40, which is the current (and rising) 200-day MA, and I can live with that given my DIS earnings and share price projections over the next three years. |
| The case against accumulating (the stock): | |
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1. With Eisner and shareholders fighting in court over the firing and incredibly huge payout to former president Michael Ovitz, the legal costs and negative investor optics could be a continuing drag, Also, the strong religious lobby for GWB’s re-election could possibly start to focus on Disney’s move away from conservative family values-based entertainment in recent years. |
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