Of Mouse and Yen

The Times today continues a new feature, Stock Exchange, with staff writers James Peltz and Michael Hiltzik debating the merits of individual stocks and other investments.

Walt Disney (DIS)

Disney close Monday: $38.56

Mike: Our first stock this week is Walt Disney Co. I’d like to make full disclosure before we start, Jim: I saw Disney’s “Armageddon” the other day, and I hated every second of it. I don’t think I’ve seen a stupider movie since, well, “Independence Day.” But I’d buy the stock anyway.

Jim: What a country. You can hate what a company sells and still like its stock. I like the shares too, even though Disney’s having a so-so year. But first remind everyone that there’s much more to Mickey & Co. than movies.

Mike: There’s Disneyland and Walt Disney World, of course, and its interests in Tokyo Disneyland and EuroDisney in France. It owns the ABC television network and a bunch of cable channels, including ESPN, the most profitable television network in the country. Then there’re the Angels and Mighty Ducks sports teams in Anaheim.

Jim: The stock, which just split 3-for-1 and now trades in the high 30s, has been a home run for years, ever since CEO Michael Eisner took over in 1984. Under his reign, Disney’s stock has run up about 3,000%, or roughly 28% a year on average.

Mike: Here’s why: Walt Disney is one of the most efficiently integrated entertainment companies on the planet. All the other entertainment conglomerates talk about “synergy,” but Disney is the only company that actually does it. When a company like Time Warner tries to get its publishing and its broadcasting operations working together, you end up with fiascoes like the recent CNN-Time magazine nerve-gas story, which the company has had to retract.

Jim: No retractions for “Mulan” yet, I take it?

Mike: When Disney does synergy, you’ll get “Mulan” the movie in the theaters, “Mulan” bric-a-brac in the Disney retail stores, “Mulan” the parade at Disneyland and Disney World . . . .

Jim: Don’t forget “The Making of ‘Mulan’ ” on the Disney Channel.

Mike: . . . Sure, and “Mulan” the video series for rent and sale at your local video store, and, finally, “Mulan” on “The Wonderful World of Disney” on ABC-TV a year or two from now. Have I missed anything? The “Mulan” kick boxing championships on ESPN, perhaps?

Jim: And that’s a brand-new property. We haven’t even mentioned Disney’s invaluable library of movies and other features that they keep trotting out and exploiting over and over. It’s like an annuity for them.

Mike: They know how to squeeze “synergy” until it screams for mercy.

Jim: The funny thing is, you can find dents in Disney’s armor, but not enough to bad-mouth the stock. Like right now. Disney’s earnings growth is pulling up, ABC’s ratings suck, and some of its movies, like “Armageddon” and “The Horse Whisperer,” aren’t the blockbusters some expected.

Mike: Right. This year there’s been a rare occurrence--almost every part of Disney has been under-performing. Back in June, five major investment firms on the same day cut their estimates on Disney’s earnings for 1998 and 1999. The stock fell more than 6% the next couple of days. But guess what? Since then, it’s risen nearly 13%.

Jim: That’s because, even when things get soft, Disney keeps coining money. It’s still expected to throw off some $2 billion of excess cash over the next year or two, which it could use to buy back shares, hike the dividend or buy someone else. That drives the stock, which, by the way, trades at a rich 33 times next year’s earnings even though Disney’s results have lost a cylinder.

Mike: They squeeze every drop of revenue and profit that you can squeeze out of every single property. Plus, Disney is full of control freaks who try to keep a tight leash on spending.

Jim: They must have been at lunch when “Armageddon” got made for $140 million. Anyway, how big a problem is ABC?

Mike: Network TV is a classic industry in which every dog has its day, because nobody knows enough to have a permanent lock on audience sentiment. NBC is riding high now, but sooner or later ABC or CBS will pick up the slack, and everyone will write stories about how amazing it is that the network that was in the toilet a year ago is now thumping its competitors.

Jim: I also wonder, though, about Disney’s management over the long haul. Let’s face it: Eisner makes this company go, and he doesn’t have a clear successor. Although he’s only 56, he had heart bypass surgery three years ago.

Mike: He’s the ultimate control freak, and he’s had a lot of trouble keeping subordinates happy--and keeping subordinates, period. It’s an obvious concern, and it’s something that’s been raised by investors over the years. But it’s ebbed for now because Eisner seems healthy and Disney’s prospects look good.

Jim: Fair enough. Two buys for the Mouse.

SCUDDER JAPAN FUND (SJPNX)

Nikkei close Friday: 16,570.78

Jim: Next, Japan’s been in the news a lot lately, so let’s look at The Japan Fund of Scudder Investment Services as a mutual-fund proxy for whether buying Japanese stocks makes any sense.

Mike: Going from Disney to Japan under current conditions is like going from the sublime to the ridiculous. But let’s be brave.

Jim: Actually, this one’s easy to call. Japan is now the land of the rising sun and of falling stock prices, so even if you’ve got the $2,500 minimum investment this fund requires, don’t bother sending for the prospectus.

Mike: I agree this is an exceptionally easy call--but for the opposite reason. Japan is a screaming buy.

Jim: Now you’ve lost it. Japan’s economy is in its worst recession since World War II. The Nikkei stock average--Japan’s answer to the Standard & Poor’s 500 index--has been falling since 1989, and, naturally, the Japan Fund hasn’t fared much better. And just recently, Prime Minister Hashimoto quit after his Liberal Democratic Party, or LDP, got massacred in elections for the upper house of their parliament. So now they have to struggle through the ordeal of forming a new government.

Mike: So what’s your point?

Jim: This is a horrible investment, it’s been a horrible investment for the last several years and it’s a horrible investment going forward.

Mike: I’d certainly agree that Japan hasn’t carried its weight this decade. The Nikkei peaked at about 39,000 on Dec. 29, 1989. Over the last two years it’s been bumping along at roughly the 16,000 level, and today it’s about 16,500. It’s hard to imagine it getting much worse.

Jim: Give it to us in dollars.

Mike: If you’d invested $10,000 in the S&P; 500 in 1988, today you’d have nearly $62,000 . . . .

Jim: And if you’d invested in Scudder’s Japan Fund?

Mike: Your $10,000 would now be worth the princely sum of $9,600.

Jim: So you’d have been better off putting your money under your mattress.

Mike: Fair enough--in hindsight. But I can’t think of a better contrarian investment. You can beat the bushes for weeks and not find a single investment advisor with a good thing to say about Japan.

Jim: For good reason.

Mike: But look at the positives. I’ve just named one, which is that everybody is negative. All the bad news is fully discounted in that market. Also, this is a big economy, the biggest in the world after the United States. And although Japan has had a very unresponsive government, the Japanese public has shaken off its torpor and delivered the clear message that it wants action.

Jim: Maybe so, but they’re not going to get it. They’ll get the same inertia they’ve had up to this point.

Mike: I don’t think that’s possible. The LDP lately has gotten very educated, in part by a number of American advisors, about the policy steps it should take. There’s talk about closing failing banks, about expanding tax cuts and making them permanent, about making mortgage interest deductible.

Jim: I’ll concede that Japan has grand plans to fix their problems. But it’s not going to get done, at least not any time soon. And if you’re an investor, why in the world should you be trying to figure out how soon Japan’s going to get its act together?

Mike: You don’t have to figure out all of the macro- and micro-economic effects of every policy decision. All you need to know is that the prospects for growth in Japan are better now than most people give them credit for.

Jim: No, I’d say they’re getting the credit they deserve.

Mike: The other day, in search of a cure for my insomnia, I turned on C-SPAN and happened across a clutch of U.S. economists giving congressional testimony about Japan’s dire straits.

Jim: That would put you to sleep.

Mike: What struck me was that every one of the witnesses said Japan’s economic problems included things like the exorbitant savings rate of Japanese households, low interest rates, the government’s heavy involvement in corporate finance, and so on. Know what? These same guys 10 years ago cited the very same factors as the key to the death grip Japan then had on the world economy.

Jim: So what does that tell you?

Mike: It tells me the cycle is about to run its course. And just as in the late ‘80s and early ‘90s, when everybody thought Japan’s hegemony over world trade would last for millennia, today’s equally strong perception that Japan’s crisis is intractable is overblown.

Jim: Look, even if we agree that Japan can find the fix to its problems, the fixing could take years. Are you prepared to plunk cash into the Japan Fund knowing that it might not grow for years? Even my mattress looks better than that.

Mike: I’m not saying that Japan is going to take off. Nobody is. But the downside is limited, and for a forward-looking investor it’s time to look at Japan.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.