Great firms like Disney going for a song

In the throes of the Great Depression, in 1933, Walt Disney laid the cornerstone of his mighty empire with the huge success of Three Little Pigs, one of his Silly Symphonies that brought relief to the masses of unemployed. He followed that up in 1937 with the classic Snow White, the first American animated feature film in movie history.

Today, we are in the midst of the worst financial crises since the Great Depression, and Disney's Hannah Montana, one of its hugely successful franchises, is soon to return to television for its third season.

Make no mistake, though, we are by no means in a depression, and blue-chip companies such as Walt Disney Co. (DIS/NYSE) are highly profitable. Yet they are priced for Armageddon. That is the message delivered by Charles Brobinskoy, vice-chairman of Ariel Capital Management, to financial advisors at the second annual AIC Value Conference this week (Brobinskoy has delivered top-decile performance this year, recently taking over AIC American Focused Fund).

Since 2000, earnings per share (EPS) are up roughly 450% and its share price is down roughly 30%. The company is cheap. It's the type of company that management at Ariel relish but rarely owns because it's typically too dear. In fact, Disney has been this cheap on a valuation basis only once over the past 18 years and that was on Sept. 11, 2001.

The company has boosted earnings per share at a 16.5% compounded annual rate from 1985 to 2008. Sure, earnings declined in the last recession and bear market from 2000 to 2002 — and they will likely slow again — but that period is already accounted for.

And Disney is one of the most successful media companies in the world, owner of ABC, ESPN, Disney Channel, A&E. There are also the Disney theme parks and resorts, and movie studios including Walt Disney Pictures, Touchstone Pictures, Miramax, Pixar, etc.

This is a tremendous opportunity to own a blue-chip company at a very attractive valuation. "Something is going terribly right here and has for quite some time!" says Brobinskoy, who points out that from 1985 to 2008 Disney far outperformed the broader market, but its stock got cheaper. The company has never been this cheap in relation to the S&P 500 looking at data back to 1985.

Disney is one of many blue-chip companies trading at multi-year lows based on valuations. Brobinskoy also points to asset manager Franklin Resources Inc. (BEN/NYSE); Johnson and Johnson (JNJ/ NYSE) in the health care sector; American Express Co. (AXP/ NYSE) in financial services; and automotive giant Toyota Motor Corp. (TM/NYSE). These are the sector leaders trading at very low valuations.

In the current market environment, investors should look to companies that are well-funded, underleveraged, ideally operating in defensive sectors with access to capital.

Lehman Brothers (LEH/NYSE) failed due to excessive leverage. Disney, on the other hand, is not captive to near-term financial market dislocations. The company is not highly leveraged and its near-term debt obligations represent only 3% of its rock-solid assets.

There are some very strong, well-funded companies currently trading at knock-down valuations. They may not have hit bottom, but an opportunity to buy great companies this cheaply does not happen very often.


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