One of, if not the most globally recognized and admired media and entertainment companies in the world, The Walt Disney Co. (DIS - Free Disney Stock Report) has been a staple on the Dow Jones Industrial Average for more than two decades. It has grown from its origins as the “Disney Brothers’ Cartoon Studio” (founded in 1923 by Walt and Roy Disney) into the largest multinational media conglomerate (by revenue) worldwide. Indeed, since its early heyday, the company enjoyed a lengthy stint as the iconic creative leader and trailblazer in American animation and family-oriented film production. However, at the turn of the century, the business faced some unprecedented challenges due to unfavorable ventures and the onset of the 2001 recession. This was a difficult time for DIS stock, as was the period during and immediately following the most recent recession (2007-2009). Still, since 1985, the equity has enjoyed a solid run (excluding the aforementioned downturns), with the most impressive gains generated over the past five years, as demonstrated in the Price Performance Graph located at the top of the Value Line page. The issue has quadrupled from the multiyear low it hit in the spring of 2009, and doubled from its most recent low of about $30 in September 2011. Needless to say, DIS has been a solid bet, overall.
Taking a look at the Ranks box, the stock’s Timeliness rank was lowered to 3 (Average) back in November 2012. This downgrade likely stemmed from a challenging earnings climate in the December quarter, which led to an 11% decline in the stock price between October and November. Since then, the stock has roared back over 41% and achieved a new all-time peak of $67.11 on May 9th. Investors have undoubtedly been swooning over the much improved earnings performance and year-to-year comparisons, not to mention the company’s myriad of intriguing prospects, including the recent acquisition of Lucasfilms. Analyst Orly Seidman notes in her Commentary that Disney’s “Studio Entertainment should be spurred by its roster of summer blockbusters, and movies scheduled to be released this year.” Of these major releases, two noteworthy titles from its Marvel portfolio, Iron Man 3 and Thor: The Dark World, are pegged to be huge box-office draws. Furthermore, the scheduled 2015 release of the first installment of the new Star Wars series is sure to attract movie-goers by the multitudes, not to mention the boundless possibilities on the backend.
As a sidebar, it is hard to imagine that around this time last year, Disney had been heavily criticized for its highly publicized film faux pas, John Carter, which was dubbed a gargantuan box-office flop. Indeed, the company’s ability to brush off such missteps is further testament to the scale, scope, and viability of its business model.
The question we must consider, however, is whether this stock has more room to run, or if momentum will be tempered in the ensuing months, as well as over the long haul. Scanning the page for evidence of fundamental indicators that a stock, which recently hit a historical high, may still prove to be a worthwhile near-term play, reveals a wealth of key metrics, beginning with the Price-to-Earnings Ratio in our Top Label. At about 19x recently adjusted 12-months earnings, the P/E is roughly in line with the market. This would suggest the stock is fairly valued after over 40% climb over the past six months, but not overvalued relative to the broader market average. Moving down across the page to the Financial Strength box, the equity’s marks for Stock Price Stability, Earnings Predictability, and perhaps most notably, Price Growth Persistence, are 85, 85, and 95, respectively (out of 100). These solid ratings point to the stock’s historical strength and the likelihood of continued ascendance.
On the other hand, according to the Projections box in the upper left-hand corner, the equity is already trading within our 3- to 5-year Target Price Range. This is based on healthy earnings-growth projections out to late decade, which we expect to be about 11% annually over the run to 2016-2018. Although Disney’s film production prospects offer considerable promise over the next few years, there is some concern that its efforts to expand market share abroad may prove costly. Ms. Seidman calls attention to the “healthy cash infusion in its overseas parks, local attractions, and cruise lines”, which could prove burdensome in light of the ongoing economic challenges facing foreign regions such as Europe and many developing nations, where growth has seemingly slowed of late. In addition, Ms. Seidman further states that, “Globalization efforts seem key to the conglomerate’s long-term strategy.” In the Statistical Array it is evident that, while the analyst is looking for a considerable bump in the operating margin for 2013, expansion beyond that is expected to be quite muted. This alludes to the likelihood of increased cost exposure over the long term.
All told, while some additional factors including the company’s somewhat lofty price-to-tangible book ratio (about 9x) may raise some valuation and future capital-gains concerns, we believe that Disney’s historical performance and financial flexibility, coupled with its enviable competitive position in the media and film markets, are solid indicators that this stock is a sound long-term investment choice even at the recent quotation. Furthermore, in the advent of clearly sustainable global economic recovery, our projections may well prove conservative, as aforementioned growth initiatives are likely to pay off handsomely in a healthier consumer discretionary spending environment.
At the time of this article’s writing, the author had no positions in any of the companies mentioned.