What Should Investors Do with Disney?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earlier this month, Walt Disney Co (NYSE: DIS) announced its most profitable quarter in the company’s 89-year history. Supported by the mega-success of “The Avengers” (here’s the full scoop) and its theme park and resort business, Disney reached third quarter earnings of $1.01 a share, beating the Street’s estimates ($0.93) and Q3 2011 EPS ($0.78) quite handily. In 2012 thus far, shares of DIS have returned a splendid 34.6%, outpacing the media industry’s average (21.1%) and competitors like News Corp (NASDAQ: NWS) at 32.9%, Time Warner (NYSE: TWX) at 17.1%, Discovery Communications (NASDAQ: DISCA) at 31.7%, and Viacom (NASDAQ: VIAB) at 8.1%. Interestingly, valuation metrics suggest that Disney’s stock price may still have some room for appreciation.
From an earnings standpoint, DIS currently trades at a price-to-earnings ratio (16.7X) below the industry average (17.3X) and its own 10-year historical average (19.3X). When growth is factored into the equation – Disney’s earnings have expanded by an annual rate of 23.9% post-recession – we can see that the stock does trade at a PEG ratio of 1.0, on the borderline of being undervalued. Interestingly, the company’s earnings have historically traded at a 14% premium to those of the S&P 500 over the past decade. This year, they appear slightly cheaper, trading at a 12% premium.
Now, Disney has experienced impressive operating (68.5%) and free (41.5%) cash flow growth over the past three years, but it still trades at a price-to-cash flow ratio (10.8X) below the industry norm (11.9X) and the likes of NWSA (12.9X), TWX (12.9X), and DISCA (20.0X); it is on par with VIAB, even though the latter has seen its cash hoard grow at a slower rate than that of Disney. It appears that investors have yet to acknowledge this growth advantage, as DIS trades at a PCFG ratio of 0.5. Similar to the PEG ratio, a PCFG below 1.0 typically signals that shares are cheap.
By the end of 2012, analysts are expecting the company to reach earnings of $3.02 a share, up 18.9% from the $2.54 it reported in 2011. By the end of the following year, the consensus rises to $3.47. This 2-year average EPS growth of 17.0% is greater than what is expected of TWX (12.2%), DISCA (13.9%), and VIAB (12.2%). If Disney meets these estimates, fairly valued shares can eclipse $60, with upside of $68 by next summer.
Like all players in the media industry, Disney will have to face the risks of less-than-ideal consumer spending, though the combination of the company’s high-quality products and brand loyalty yield a decent economic moat. As mentioned here, it is important that Disney further its footprint in the 3D movie arena, and its outlook is promising. Over the next two years, the company is re-releasing “The Little Mermaid,” “Finding Nemo,” and “Monsters Inc,” in this format, along with its impressive Marvel lineup of the next Iron Man, Captain America, and Thor movies. Moreover, Disney is also experiencing impressive growth in its leisure businesses; over the past year, sales at the company’s U.S. based resorts increased by 8%, while overseas revenues jumped by more than 21%.
To recap: Disney has just reported its most profitable quarter of all-time, though it can still be bought at a discount. The company’s movie and leisure businesses are driving its strong bottom line growth, which is expected to beat most of its competitors over the next two years. WealthLift’s Sentiment Index rates DIS as a strong buy, with 94.74% of the community’s users placing an “overperform” rating on the stock.
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