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February 08, 2006

I'll Take Mickey Mouse Over Bugs Bunny

Despite being stalled for most of the last year, Disney (DIS) has generally trended up over the past three years, rising from the upper teens to the mid-$20s. Guess what? DIS is set to complete its fourth straight year of double-digit EBITDA growth. By contrast, Time Warner (TWX) is struggling to stay in the upper single digits. DIS responds to its earnings report and is trying to breakout.

Icahn is right that TWX needs to grow faster to create shareholder value. Will splitting it apart do the trick? Does it need better management? DIS has studio plus cable networks plus broadcast TV plus theme parks. TWX has studio plus cable networks plus cable distribution plus AOL plus publishing. Theme parks and cable distribution are somewhat similar in that they are capital intensive. One big difference is that ESPN is stronger than TWX cable networks. AOL is obviously a big issue for TWX, but on EBITDA, its growth has been above the corporate average due to cost savings. Icahn would say Iger has a vision as he wants to monetize DIS content across all old and new technologies. That vision might be worth something in the multiple accorded DIS, but the multiples on 2006 estimates are close.

I like DIS now because its businesses are moving in the right direction together. Long term, the growth may shift back in TWX's favor, but turning around AOL on the top line is a real challenge.

Point me to a scenario that gets TWX to multiyear double-digit EBITDA growth, and the stock gets a lot more interesting. I don't see it right now, but I am all eyes.

Posted by Steve Birenberg at February 8, 2006 04:25 PM in DIS