Stuart Shaw, CFA

As investors, we are always looking for purchase candidates. At the same time, we are literally inundated with possible ideas from many sources: the media (print, web and TV), companies we deal with every day, and tips from stockbrokers, financial advisors, friends and relatives. I use the Company Stock Risk Profile Fast Track™ stock screen to help me quickly and easily filter out all this noise and focus my search. Stocks that pass this screen are filtered again as I put them through the entire Company Stock Risk Profile™ research process. Using these investment tools, my search for potential purchase candidates is organized, disciplined and objective.

To illustrate, in my July 2007 article, “The Dow on Fast Track”, I screened 30 Dow stocks using he Company Stock Risk Profile Fast Track™ and uncovered six possible ideas: Boeing, Disney, Exxon, Hewlett Packard, Pfizer and Wal-Mart. I then researched each of these stocks using the Company Stock Risk Profile™.

Disney was the only stock that got a Low Risk Profile rating, having failed 17 of 50 categories. The range for a Low Risk Profile rating is failing 0 – 17 categories.

Disney is one of the great brand names, and it cannot be duplicated. The company’s history is all about delivering creative product by successfully leveraging brand power using multiple platforms and technologies. This is at the core of the company’s vast entertainment franchise, which today spans media (internet, cable and network broadcasting), parks and resorts, movies (animation and live) and consumer products.

But stocks with Low Risk Profile ratings do not automatically get on my list of purchase candidates. They must have strong operating and free cash flow and a solid balance sheet, as these strengths are vital for a company to successfully compete in its markets and grow.

Disney has been demonstrating these strengths. Cash from operations rose to $6.1 billion in fiscal 2006 from $2.3 billion in fiscal 2002, and continued to grow to $6.3 billion in the latest 12-months. Although free cash flow (cash from operations less capital expenditures), at $4.7 billion, was about flat in the latest 12-months as compared with fiscal 2006, it also showed strong growth from $1.2 billion in fiscal 2002. Cash also has been flowing onto the balance sheet having ended the June quarter at $3.4 billion, up from $2.0 billion a year earlier. While the Company Stock Risk Profile™ favors companies with percentages of long-term debt to total capital of 20% or lower, Disney’s 27.1% is still quite sound.

Disney’s operating performance has been favorable. Supported by substantial profit margin expansion from operations, that is before non-operating items and taxes, return on equity rose consistently from 5.7% in fiscal 2003 to 11.6% in fiscal 2006, and continued to climb to 14.6% in the latest 12-months. Reflecting this performance, Disney reported positive earnings surprises versus Street estimates for each of the last four quarters.

Disney’s quality and sound fundamentals also come with a stock that offers good value. The Company Stock Risk Profile™ has 12 valuation categories, and the stock failed only two.

Street opinion about the stock is divided. Twelve of the 28 analysts covering Disney rate the stock hold and one analyst is recommending sell. There is ample room for ratings upgrades. Two brokerage firms initiated coverage in September with buy ratings.

I am concerned about how a slowing economy or a recession would impact the company, particularly the theme parks and resorts. Tom Staggs, Disney’s Chief Financial Officer, stated at a Merrill Lynch media conference on September 17, 2007 that bookings for the fourth calendar quarter are up over last year, and that “there’s no current evidence of a downturn”. Nevertheless, Disney’s products and services are not necessities. A trip to Disney World can be easily postponed when times get tough.

I believe Disney is a good idea. I used the Company Stock Risk Profile’s™ stock screen and research tools to find Disney and focus on the key variables. Admittedly, I am biased since I developed these tools. Use the research tools and methods that are right for you. What is most important is doing the research so that you know what you are buying and the risk you are taking.