(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of DIS.)

Walt Disney Co. (DIS) shares could be set to surge if history has anything to say about it. The last time shares were this cheap was in October of 2016, and that was followed by a rise in the stock by about 26%. With earnings expected to surge by over 20% in 2018, Disney shares could be set to rise this year by almost 20%. (For related reading, see also: Disney's Stock Advance Could Be Just The Beginning.)

Analysts are looking for Disney's earnings to surge by roughly 23.5% in fiscal 2018 to approximately to $7.05, while revenue is expected to grow by just over 6% to $58.55 billion. Meanwhile, earnings are expected to increase by another 9% in fiscal 2019, and by 6% in 2020. The U.S. tax law recently put into effect is helping Disney to improve its bottom line, lowering the fiscal 2018 effective tax to 24.5% from 35% the year prior. 

Cheap Valuation

The chart below shows how low Disney's valuation has fallen in 2018. It stands at just 13.5 times fiscal 2019 earnings estimates of $7.66. The last time the stock's valuation fell this low was in October of 2016, and it ultimately led to shares of Disney rising from approximately $91 to $115 by the spring of 2017, a climb of over 26%. 

DIS data by YCharts

Since late 2014, Disney has averaged a one-year forward earnings multiple of roughly 16.5, with a standard deviation of approximately 1.65, putting it in the range at 14.9 to 18.2 times. At its current valuation, Disney is currently trading below its historical norm, at nearly two standard deviations below its historical average. (For more, see also: Disney Is Poised to Break Out on Fox Deal.)


Should Disney shares return to the mean of roughly 16.5 times one-year forward earnings estimates of $7.66, shares of Disney could rise to approximately $127 from its current price around $107, a rise of approximately 20%. But that may not be easy, because since 2016, Disney has only seen its PE rise to that earnings multiple on three occasions. 

Fundamental Chart Chart

Growth Drivers

Additionally, Disney's revenue and earnings growth could see added benefit from the recent purposed acquisition of the asset Twenty-First Century Fox, Inc. (FOX), and its plans to start its own online video streaming service over the next two years. 

But it is worth noting Disney still gets a large portion of its revenue from its cable networks such as ESPN, which has been the focus of investors due to mounting subscriber losses as customers continue to cut the cord. Should that trend worsen it could put downward pressure on revenue, earnings, and the stock's valuation. 

With Disney valuation trading at a nearly 3.5 year low, earnings expected to grow, and a host of additional growth drivers in the pipeline, Disney's shares appear too attractive to ignore, especially with a long-term outlook.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.