Disney's Book-Value Dazzle

By Glenn Curtis | March 04, 2009 AAA

Many bargain-hunting value investors believe that buying shares in companies that trade under book value is a wise idea. Buying a stock "under book" may limit the potential downside in some circumstances, while leaving the investors fairly well-positioned should a major catalyst emerge (ie. the company could post stellar earnings that the Street will take notice of, or it might obtain crucial research coverage).

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Of course the problem with buying shares that trade under book value is that they may remain unnoticed, unloved and/or continue to trade in the doldrums for a very long time. There might also be another problem with the company, which could be why the stock is trading at such a low multiple of book value in the first place.

I personally believe that book value is a good indicator but that other metrics such as price to earnings, price-to-cash flow and float should probably be considered after you've done your initial book value screen. Let's take a look at a few companies that made my first screen - they trade under book value.

Company Price/Book Market Cap
Disney
(NYSE:DIS)
0.90 $29.4 billion
Dow Chemical
(NYSE:DOW)
0.49 $6.6 billion
General Electric
(NYSE:GE)
0.67 $74.6 billion
Goldman Sachs
(NYSE:GS)
0.62 $34.9 billion
Time Warner
(NYSE:TWX)
0.63 $26.8 billion
As of market close, March 6, 2009


Disney
Americans are struggling financially these days, which means that fewer consumers are heading to expensive theme parks like Disney World or Disney Land. In addition, they probably aren't splurging on these two theme parks' expensive brand-name memorabilia and toys either. Because of this tightening of consumer belts, other theme parks and entertainment facilities like Cedar Fair (NYSE:FUN) and Great Wolf Resorts (Nasdaq:WOLF) will begin to fight even harder for your business against the Disney empire. (If you thought investing and fun don't go together, think again. Find out more in Leisure Funds: Where Luxury And Fun Come To Make Money.)

I don't think that the company should be relegated to the doghouse in perpetuity or simply forgotten about because Disney has a lot to offer. In addition to theme parks, it's got its hands in the movie and television businesses (including ABC and ESPN). And, even with the economy in a slump, the company is still expected to have earnings per share of $1.77 a share in the current year and $2 a share in fiscal 2010. Investors might want to know that it trades at only about 9-times the above-mentioned current year estimate and at about 8-times the fiscal 2010 estimate.

I should also point out that the company has a nice history of paying dividends. According to its December release, the January dividend payment represents the 53rd consecutive year of dividend payments to shareholders. Also, the forward yield is just north of 2%. That's attractive in my book, although it is important to understand that dividends are never guaranteed.

Bottom Line
Buying a stock under book value is no guarantee of investment success; however, I like to search for and screen for those types of companies periodically because I think the resulting list provides a good starting point for further research. (Turn frustrating hours into profit-turning minutes by managing your investing time properly, see Five Quick Research Tips For Busy Investors.)

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