(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of DIS.)
The Walt Disney Co.'s (DIS) stock has come under pressure over the past year with the stock down by about 10%, severely underperforming the Consumer Discretionary Select Sector SPDR ETF (XLY), which has jumped by nearly 17.5%. But analysts are still bullish on shares of Disney and see the stock rising by roughly 17% from its current price of almost $102. (For more, see also: Disney's Stock Looks Like a Bargain.)
The pendulum was starting to swing in Disney's favor as investors began focusing on the new online streaming media service and the acquisition of assets from Twenty-First Century Fox, Inc. (FOX). These two pursuits gave investors dreams of a streaming media powerhouse that would challenge Netflix Inc. (NFLX). But then in February, Comcast Corp. (CMCSA) announced it was going after a critical asset in the Fox-Disney deal, in the UK based Sky Plc., with a higher bid quickly souring the mood for Disney on fears of a bidding war.
A Rise to $119
Analysts have been raising Disney's price target since the start of the year and have an average price target, according to Ycharts, of roughly $119, about 17.5% higher than the current stock price. Of the 26 analysts that cover the stock, 58% have a "buy" or "outperform" rating on the stock, while 27% have a "hold" rating, and 15% have a "underperform" or "sell" rating, according to Ycharts.
Cheaper Than Peers
The reason for the optimism around the stock may be because the stock only trades at 13.2 times 2019 earnings of $7.71. That is nearly 40% below the average one-year forward PE ratio of 22 of the top 25 companies that make up the Consumer Discretionary ETF, with a median PE ratio of those same 25 companies of nearly 16.
Analysts are looking for Disney to grow revenue by nearly 6.25% in 2018 to $58.58 billion, while earnings are expected to climb by 23.2% to $7.03. That growth is forecast to slow in 2019, with revenue projected to increase by only 4%, and earnings to grow by 9.7%. The slow revenue and earnings growth are one of the key reasons why investors became excited over the news of Disney launching the new streaming subscription services and the acquisition of Fox assets, with expectations of a new layer of growth for the company.
But with question marks around Disney and its purchase of Fox, and the new streaming service in the early days of rolling out, there are plenty of reasons for the bearish mood on Disney. Investors will likely get a few of those questions cleared up when the company reports its next round of quarterly results in early May.
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 holdings. Information 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.