Disney: Love the Company, But Wait On The Stock

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Media conglomerate Disney (NYSE: DIS) has been on a remarkable run. The stock has increased by 40% so far this year, with gains of more than 85% over the past 12 months. It doesn’t take much convincing to become bullish on the company, as it has developed a consistent track record of delivering strong performances. But it’s hard not to get nervous whenever a stock has made such a dramatic surge.

Its brand is well-known around the world, including parks, resorts, cruise ships, and a host of other businesses. But Disney’s current valuation looks expensive, and I see few additional catalysts to sustain its momentum. All of its good news is known. The stock might be a great hold at the moment, but its recent quarter indicated that a better entry point might soon arrive for patient investors.

A good, but not magical, quarter
Disney's revenues were not what the Street expected, but the company still delivered. It reported revenues of $11.1 billion, up 4% year over year, although that figure came in slightly below the $11.3 billion forecasted by analysts. On the positive side, the company beat on its bottom line by reporting $1.01 per share, versus expectations of $0.93.

The surge in EPS owed to the company's lower-than-expected restructuring charges - $7 million during the quarter, compared to $34 million a year ago. So although it disappointed on the revenue side, Disney more than made up for it in terms of profitability. Its segment performance, however, was somewhat mixed.

Disappointingly, revenue from its studio arrived flat. But this was offset somewhat by better-than-expected sales from its consumer segment, which rose 8% from the same period of a year ago. Network revenue, the company’s largest division, rose modestly by 3% to $5.08 billion, while parks and resorts surged by almost 10% to $3.44 billion. Impressively, operating income from that division grew 21% to $630 million.

The company offered little Q4 guidance with respect to revenue or profitability, but I'd expect declines on the broadcast side of the business – particularly as viewers turned to the Olympics on a rival network. What’s more, with studio revenue having arrived flat for Q3, I would expect moderate improvement in that area in terms of DVD and Blu-ray sales, particularly with the company’s recent slate of popular hit films such as The Avengers.

Bottom line

Overall, this typical Disney quarter offered few surprises. The company is as solid as they come, but I need more compelling reasons to believe that there is meaningful upside movement left in the stock in the near term. Disney is already trading at or above its fair market value, and slightly at a premium to rivals such as Time Warner, CBS, and Viacom.

As it stands, the stock is merely percentage points away from yet another 52-week high. When you couple this with the fact that its next quarter may be somewhat of a disappointment, I think the best play here is to wait - particularly with respect to its recent run. So although there are many compelling reasons to love the company, this is one of several reasons why I just don’t think it makes a whole lot of sense for new investors. 

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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