Inside Wall Street: Bruised Disney still attractive

Jittery investors punish the leading media and entertainment conglomerate for a dim forecast.

By Gene Marcial Nov 12, 2012 2:39PM

Movies copyright Fuse, Fuse, Getty ImagesMany investors have been waiting for a chance to buy shares of the high-flying Walt Disney (DIS) at a discount. 

Their patience paid off when the stock stumbled on Nov. 9 -- the day before the global operator of theme parks, filmed entertainment and television warned that although fiscal fourth-quarter results were robust, Disney could be hobbled by problems in the year ahead.


That prompted nervous investors to bail out, driving the stock down to become the biggest loser in the 30-stock Dow Jones Industrial Average that day. DIS plunged 6% to $47.06 a share. 

Since 2009, the stock has been a strong and vigorous outperformer, rocketing from $15 a share that year to an all-time high of nearly $53 on Oct. 4, 2012.


But not everyone turned against Disney. In fact, Tuna N. Amobi, analyst at S&P Capital IQ, not only reiterated his "strong buy" recommendation but boosted his price target on the stock by $2 a share, to $57.


The analyst based his optimism on his revised sum-of-the-parts valuation from estimated 2013 earnings before interest, taxes, depreciation and amortization (EBITDA) and a price-earnings-ratio-to-growth outlook.


He noted that fiscal 2012 was "strong," fueled by gains from the company's TV networks -- ESPN, ABC, ABC Family, and the Disney Channel -- and the positive results from its theme parks in the U.S., Hong Kong, as well as the cruise ship operations, says Amobi.


And looking ahead, he sees consumer products and the movie studios further buoyed by the Marvel franchises, with the pending $4 billion acquisition of Lucasfilm. He also views the ABC ratings still as a "swing factor" in Disney's overall results.


Moreover, Amobi isn't as worried about management's discussion of problems ahead as other analysts and Wall Street have been. "The September quarter call affirms the view of a likely enhanced return on invested capital after fiscal 2012's peak capital expenditures, even as the new Shanghai park is set to open in 2015," says Amobi.


Disney's strong results in 2012 eased further concerns about a consumer spending slowdown at the worldwide theme parks and advertising businesses, says the analyst.


Also highly optimistic is Disney Chairman and CEO Robert A. Iger, who described 2012 as a "great year creatively, financially and strategically, resulting in record revenues, net income, and earnings per share."


Meanwhile, Amobi expects the solid box-office performance of such films as "The Avengers" to significantly boost the studio and consumer products business division into fiscal 2013, with further Marvel upside thereafter on follow-on installments to other associated franchises, such as "Thor" and "Captain America."


Equally important for shareholders, "We note ample financial flexibility for share buybacks and sustainable dividends," he adds. Disney currently pays a dividend yield of a relatively healthy 1.20%. Amobi figures Disney will post earnings of $3.49 in fiscal 2013, up from fiscal 2012's $3.13.


One big positive about Disney's stock is that its top holders are some of the largest institutional investors, led by Fidelity Management & Research, State Street Global Advisors, and Vanguard Group. 


Orly Seidman, analyst at investment research firm Value Line, says Disney's "top-quality shares are favorably ranked for the year ahead," as the media and entertainment conglomerate "has made great strides across its business lines over the past few quarters," with its studio entertainment and theme parks and resorts operations likely paving the way for further growth in the future.


He argues that the acquisition of Lucasfilm augurs well for Disney as there is another Star Wars episode scheduled for 2015. He expects Disney will leverage the Star Wars brand in its theme parks and ought to use Lucasfilm's technology in the Disney films.


Indeed, Disney henceforth could be billed and branded as the Star Wars stock that could propel the media and entertainment giant to greater heights in the planet.      

Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.


Tags: DIS




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