Valuation: Walt Disney Company (DIS)

 Company Profile:  Walt Disney Company (DIS) (obtained via Google Finance)

The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company. The Company operates in four segments: Media Networks, which includes a domestic broadcast television network, domestic television stations, cable/satellite networks and international broadcast operations, television production and distribution, domestic broadcast radio networks and stations, and Internet and mobile operations; Parks and Resorts, which generates revenues from the sale of admissions to the theme parks, room nights at the hotels, and rentals at the resort properties; Studio Entertainment, which produces and acquires live-action and animated motion pictures, direct-to-video programming, musical recordings and live-stage plays, and Consumer Products, which partners with licensees, manufacturers, publishers and retailers to design, promote and sell products based on Disney characters and other intellectual property. In May 2006, it acquired Pixar Animation Studios.

Business and Management Review

1) Is the business simple and understandable?

At the simplest level, Disney is in the entertainment business.  This business includes operations in movies, television, products, and theme parks, among other things.  The entertainment business can be simple and understandable to the majority of investors.

2) Does the business have a consistent operating history?

Disney has been consistently operating in the entertainment business since Walt Disney formed the cartoon studio in the 1920s.  For the most part the company has not wavered from this initial operating strategy.

3) Does the business have favorable long term prospects?

It seems to me that Disney will remain solvent for years to come at the very least.  Above that, the company does seem to have favorable prospects as the brand name is extremely strong and provided management does well in the future, the company will remain strong as well.  In other words, kids will continue to love Disney characters and want to go to Disneyworld.  As long as the management can keep from killing the company, it should do reasonably well.

4) Is management rational?

A lot of people had mixed feelings about Michael Eisner.  Now that he has been replaced by Bob Iger, the sentiment towards management has improved again and the performance of the company seems to be benefiting from the change.  Having been in the position of CEO since 2005, the earnings in many segments have improved under Iger’s leadership. 

5) Is management candid with its shareholders?

The company’s investor relations page is much more in depth than most, and we enjoyed perusing the in depth history about Disney and reading about the Disney Legends.  Of course, all the business information was interesting too.

6) Does management resist the institutional imperative?

We find no reason to believe the management is following the institutional imperative.

Financial and Value Review

Defensive:

1) Size of firm

The market cap of Disney is $63.14 billion.  Pass.

2) Strong financial condition

The company’s current ratio is about 1, far below the 2.0 requirement.  Fail.

3) Earnings stability

The company has had a consistently positive net income for over 10 years.  Pass.

4) Dividend record

Disney has consistently paid a dividend for over 10 years.  Pass.

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  Pass.

6) Price to earnings analysis

With a ModernGraham PE ratio (using our Methods) of 20.1, the requirement of under 20 is met if the price falls a little bit more.   We’ll be lenient and let it Pass.

7) Price to assets analysis

The ModernGraham Price to Book ratio for Disney is about 2.15, below our 2.5 limit.  The multiple of PE to PB is below our requirement of 50.  Pass.

Overall

Having passed 6 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe Disney may be suitable for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is below 1.5 and debt to net current assets is not below than 1.1.  Fail.

2) Earnings stability

The company has achieved a consistently positive net income for over 5 years.  Pass.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is not less than 150% of the net tangible assets.  Fail.

Overall

Though the company has only passed 3 of the 5 tests for the enterprising investor, since we found it may be suitable for the defensive investor, it would not make sense to say that the investor who can take on more risk due to having the time to do more research would not take the company.  Therefore, it also may be suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be around $35. 

Opinion:

Since the company is currently trading at about $32, we feel it is currently fairly valued.  If the price continues to dip due to market fluctuations, it may be a suitable investment pending further research by the investor.

Ben’s wife held a miniscule position (single share) in Disney at the time of publication.  Also, please read our disclaimer and Our Methods.

Company Review – Pogo Producing Company

Profile:  Pogo Producing Company (PPP)

Pogo Producing Company is engaged in oil and gas exploration, development, acquisition and production activities in North America, both onshore in Canada and the states of New Mexico, Texas, Louisiana, Wyoming and Indiana, and offshore in the Gulf of Mexico (primarily in federal waters offshore Louisiana and Texas). The Company also conducts exploration activities in offshore New Zealand. As of December 31, 2005, it owned approximately 3,885,000 gross leasehold acres in oil and gas provinces in North America and approximately 1,044,000 gross acres in New Zealand. As of December 31, 2005, approximately 86% of Pogo Producing Company’s reserves are located onshore. On August 17, 2005, it closed the sale of Thaipo Limited, a wholly owned subsidiary of the Company (Thaipo), and all of the Company’s 46.34% interest in B8/32 Partners Limited. On September 27, 2005, it completed the acquisition of Northrock Resources, Ltd. In May 2006, the Company acquired Latigo Petroleum, Inc.

 

Business and Management Review

 

1) Is the business simple and understandable?

As with many of the other companies we have reviewed on this site, the details of the business of gas and oil exploration is difficult to understand.  The average investor does not hold an engineering degree and may not understand how the refining of oil works or the process of the development of new fuels.  However, the fundamentals of the business are simple:  Look for the raw materials, extract them, then refine and sell them.

 

2) Does the business have a consistent operating history?

Pogo Producing Company was founded in 1970 as an oil and gas exploration company and remains in that operating business today.  In the past 10 years, the company has paid a dividend consistently and has only experienced one year with a negative net income.  In our view, Pogo Producing Company does have a consistent operating history.

 

3) Does the business have favorable long term prospects?

Recently, I had a conversation with a couple of intelligent individuals about economic moats.  A detailed explanation about a moat will be forthcoming, but for now think of it simply as an advantage a company holds that makes it difficult for competition to hold a significant factor in the company’s long-term prospects.  Looking at Pogo, it does not appear that they have a significant moat, if they have any at all.  This may or may not end up being a big deal, but it certainly does not help as there are 178 other companies in the Oil & Gas Operations sector as listed on Google Finance. 

 

4) Is management rational?

We are unconvinced of the rationality of some of management’s ideas.  Though we agree that the company should repurchase common shares as they are at an attractive price, we are concerned about the rise in long-term debt and pursuit of growth through acquisitions.  Growth should be made through investments from operational income, not from the increase in debt.  Especially when the company is trying to repurchase shares – the debt/equity structure of Pogo is changing, and the current shareholders may or may not want that to happen.

 

5) Is management candid with its shareholders?

Pogo Producing has a detailed investor relations page, including webcasts, presentations, and other interesting and helpful information.  The only thing we would like to see more from the website would be a more detailed company information and history page.

 

6) Does management resist the institutional imperative?

We are not entirely convinced that the management of Pogo is resisting the institutional imperative.  Their pursuit of acquisitions through increased debt is a common path of many companies.  In addition, we have not seen evidence of the company clearly avoiding the institutional imperative.

 

Financial and Value Review

 

Defensive:

1) Size of firm

Pogo’s market cap is approximately $3 billion, which is greater than the requirement of $2 billion for the defensive investor.

 

2) Strong financial condition

Pogo does not have a current ratio of higher than 2 (the current ratio is 0.87).  Therefore, it fails this test.

 

3) Earnings stability

Pogo had a negative net income in 1998, which eliminates it from the earnings stability requirement.

 

4) Dividend record

Having paid a dividend since 1994, it passes the requirement of dividend payments for 10 straight years.

 

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years. 

 

6) Price to earnings analysis

With a PE ratio of 13.09 (see our methods), it passes the requirement of 20 or below.

 

7) Price to assets analysis

With a Price to book ratio of 1.18, it passes this test as well.

 

Overall, Pogo Producing Company does not pass enough of the tests to be suitable for the defensive investor.  Its total score is 6 out of 8.

 

Enterprising:

1) Strong financial condition

Since the current ratio is not higher than 1.5, Pogo fails this test.

 

2) Earnings stability

Earnings have been positive for the last 5 years.  Pogo passes this test.

 

3) Dividend record

The company currently pays a dividend.  Another pass.

 

4) Earnings growth

Earnings are greater now than they were 5 years ago.  Pass.

 

Overall, with a score of 3 out of 4, Pogo is suitable for the enterprising investor.

 

Valuation:

Our valuation model finds a fair value to be about $84, so there is certainly room for this company’s price to rise as the intrinsic value and market price approach each other in the long-term.


Opinion:

Overall, we believe Pogo Producing Company to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, and at an attractive undervalued price.

Neither of us held a position in Pogo Producing Company at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

 

 

Undervalued Company of the Week – MCY

Mercury General Corporation (MCY) 

The company of the week this week is Mercury General Corporation (MCY), the insurance company engaged primarily in auto insurance in California.  The company also sells a variety of products outside of California.  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     Insurance is and always has been a simple and understandable business.  From the customer’s view, the customer pays a little bit of money each period in exchange for the assurance that in the event of unplanned occurrence, they will be provided with the funds they need.  From the insurer’s view, each customer is analyzed based on risk factors that determine the amount of premium the customer has to pay.  Then the insurer takes in more in premiums than they expect to pay out in claims and keeps the difference.

2.  Does the business have a consistent operating history?     

Mercury has operated as an insurance agency since its inception in 1961.  The company has had a positive net income for over 10 straight years, has paid a dividend for over 10 straight years, and has increased earnings by over one third in the last 10 years.  According to its latest annual report, the company has “created shareholder value by adhering to underwriting standards, focusing on cost controls, effectively managing our claims process and developing strong partnerships with our independent agents. Historically, this uncompromising commitment has enabled us to perform better than most of our competitors. Mercury’s attention to detail, embedded in our culture, has served our shareholders, employees and customers well over the past 40 plus years. We will continue to focus on these standards.”

3.  Does the business have favorable long-term prospects?

     Insurance itself is a product that will be needed by individuals and institutions for the rest of time.  The products may change as technologies change (will automobiles be the same in 100 years as they are today?), but the overall concept will remain.  Mercury has historically been one of the pioneers of risk-based insurance.  The people in Florida and California face different premiums and policies than the people in Illinois due to the different risks involved.   In addition, Mercury is well diversified geographically across the nation.  Geographic diversity is critical for an insurance agency to prevent catastrophic losses from natural disasters.  We believe that the concepts of risk-based insurance and geographic diversity give Mercury a strong business plan and favorable long-term prospects.

4.  Is management rational?

    Mercury is still led by its founder, George Joseph.  During his tenure, the company has grown considerably, and has increased dividends at an average rate of 20% on an annual basis since 1986 – a difficult feat to accomplish over a 20 year period.  The management is focused on building their non-Californian premiums in an attempt to become even more geographically diverse.  Mercury currently maintains a combined ratio of 91.9% compared to the industry average of 95% (anything below 100% means the company is achieving profitable underwriting).  We believe these accomplishments are evidence that management has acted rationally in the past and can be assumed to continue to act rationally. 

5.  Is management candid with its shareholders?

Management appears to be candid with its shareholders.  In the latest annual report’s letter to shareholders, the management mentions its position and plans regarding the Krumme vs. Mercury litigation, a lawsuit the company is involved in considering the charging of broker fees.  The company also has an average investor relations page.


6.  Does management resist the institutional imperative?

    As stated above, Mercury has been a pioneer of risk-based premiums and other insurance industry methods.  Throughout our research of Mercury, we have found no evidence to suggest that Mercury has behaved in a manner consistent with following the institutional imperative.
 

Financial and Value Review

Upon our review, we find Mercury General Corporation to be suitable for the defensive and enterprising investor following Benjamin Graham’s value investing strategy.  The company has a sufficient size, earnings stability, dividend record, and earnings growth.  In addition, we find the PE ratio to be 12.66, and the PB ratio to be 2.04, both levels below our limits for defensive investors.  We believe all companies that are suitable for defensive investors are also suitable for enterprising investors.

We believe the company has potential to reach $80/share in the next few years. 

Neither of us held a position in Mercury General Corporation at the time of publication.  Also, please read our disclaimer and Our Methods.

Please register and discuss this article in our forums.  Your comments help us mold our future articles.

 

 

Value Investing Weekly – Issue 5

This week’s article pertains to the ease and availability of purchasing stock at discounted commission prices. We have dedicated this site to research in finding appropriate stocks to purchase, but how does the value investor go about purchasing these shares? It is extremely easy to both open brokerage accounts and purchase stock with remarkably low commissions.

Firstly, if you are seeking to open a brokerage account there are countless low cost online brokers available. TD Ameritrade is my broker of choice, and I have had nothing but positive experiences with dealing with them. Their commission is a flat $9.99 fee for all equity trades regardless of size of transaction. Before, they used to charge a quarterly service charge for accounts with low balances, but they have since eliminated this all together. TD Ameritrade offers margin accounts, options trading, and short selling all for various commission charges that are low relative to the higher priced firms. Besides TD Ameritrade, there are numerous other firms to mention: Charles Schwab, Scottrade, and E*TRADE among others. All mentioned firms and others I failed to mention can offer the services you are seeking for nominal fee(s). Generally, in order to open an account a minimum deposit of $500 or so is required.

There are ways however to own stock without going through the above mentioned steps, by buying stock directly from the company itself. Essentially you own the stock but the company’s holding company physically holds the certificates until you request to have them mailed to you. You can then deposit these certificates into your brokerage accounts for a nominal fee and can trade them as though you purchased through your broker. The fee for participating in this purchase varies from firm to firm, but it is significantly lower than any online or traditional broker. A great listing of companies participating in this is Direct Stock Purchase Listing which shows current listings. I personally have never participated in this program, but I know that my partner Benjamin Clark has in the past.

All of these options allows the investor to eliminate as much unnecessary service and transaction costs in the acquisition of stock and increases overall rate of return. The high end brokers such as JP Morgan and Merrill Lynch are great companies, but for the investor with the knowledge to make their own investment decisions they are not necessarily the greatest fit. Keep costs low, maximize returns is the thinking in all investors minds, don’t waste your capital on commission.

As always please comment in our forum, your comments truly help! You may need to register before posting.

Neither Ben nor I own any of the above mentioned securities, please review our disclaimer.

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