Phil Town

WHAT TO DO WHEN EARNINGS GROWTH AND EQUITY GROWTH DON'T MATCH

Here's Allen's second submitted question.  Yesterday we talked about whether or not he should consider dumping his Disney shares.

Hey Phil Town,

I would like to know your thoughts on selecting a growth rate when the earnings growth, (and analysts estimate of earnings growth) vary widely from equity growth. (In Disney's case, the historical PE's tend to be much closer to 2* earnings growth than 2* equity growth).

Thanks--Allen

A QUICK LOOK AT DISNEY (DIS)

Allen from Moorpark, CA had a couple questions worth sharing with other Rule #1 readers.  I'll answer this one today and his other question tomorrow.

Hi Phil Town,

What *DO* you do when the growth rates are all over the map? For practice, I'm trying to analyze Disney, which is *NOT* a Rule #1 company, but we have a zillion shares from when my wife was a little girl.

The 9, 5 and 1 year equity growth rates are 5.7%, 2.8% and 0.1%, but analysts forecast 12.15% earnings growth, and actual 9, 5 and 1 year EPS growth is 7.4, 16.8 and 10.7%.

So the EPS growth is there, but the equity growth doesn't support it. Since sales growth and ROIC are weak, and long term debt is 5 years of free cash flow, I'm not thrilled. But the problem with selling, of course, is the *BIG* tax bill that we'd be hit with. Am I missing anything? Any thoughts?

Thanks so much for reading this, and have a good weekend!

Allen

YHOO & INTANGIBLES FOLLOWUP

A few days ago, Monk brought up some interesting observations about YHOO and Intangibles in the Comments.

Our exchange is useful enough that I decided to reprint it here.

Monk's comment:

As a new student of all this, I agree that Intangibles do make this process all the more scary. I agree that GOOG has a low percentage of Intangibles, and that may have been a bad example. By my read, YHOO on the other hand seems to have a lot more Intangibles percentage than you came up with. From Morningstar's site, under the balance sheet for 2005, YHOO had a Total Equity of 8566.4 and Intangibles of 3430.2. Am I reading it wrong?