Walt Disney Co (NYSE:DIS) has powered up by 6% over the past month. This could be due to a number of factors, but let’s face it. The pending release of Star Wars: Rogue One probably has a lot to do with the excitement in Disney stock of late.
Early reviews seem to be mixed-to-favorable, but the film is almost guaranteed to do mega-business. This will be important for DIS shares over the next two or three quarters as it tries to find its way with ESPN.
So what exactly does this mean for Disney stock investors — both those who are already long, as well as those considering a new position?
Breaking Down Disney
First, let me be blunt: Disney stock is a core portfolio holding for long-term diversified portfolios. DIS is the world’s premier entertainment brand. Everybody knows the Disney name. Everybody knows the famous Disney movies. DIS stock has been benefiting from the purchases of Pixar, Marvel and LucasFilm. And Disney makes money.
Back in May of 2012, when DIS purchased Marvel, I wrote that it was a brilliant acquisition. This was a challenge to a Sanford Bernstein analyst who claimed that the acquisition was a “good one but not necessarily a great one.” This was apparently so controversial that the Hollywood press picked up the story.
That silly analyst said that Marvel films would have to gross at least $437 million annually to justify the cost. Can you believe it? Why, it wasn’t at all evident that would happen.
Unless you were paying any attention at all.
In fact, the films alone grossed $2.3 billion worldwide in 2013, $2.2 billion in 2014, $2.1 billion in 2015 and year-to-date have pulled in more than $3 billion.
I hate to say it, but … “LOL.”
This doesn’t even account for all the merchandising and other ancillary revenues from things like Marvel-branded original series. I’m thinking that analyst must be hiding in his closet about now.
As for Star Wars, last year’s Episode VII grossed $2.07 billion. All by itself. Plus another $161 million in domestic DVD and Blu-ray sales. I have no idea if Rogue One will hit that worldwide gross number, but I think it will be over $1.5 billion. Obviously, this is an important film for Disney stock because DIS needs to prove it can spin off other properties from the flagship franchise.
Regardless, Star Wars will be around for a long time.
So with that knowledge, what is the move in the near-term if you have not yet purchased DIS stock? Let’s start with valuation.
Putting a Value on Disney Stock
At $104 per share, or a market cap of $166 billion, Disney stock trades at 18 times trailing-12-month earnings. Earnings are slated to grow 12.1% next year. Add in a 1.5% yield. Then add a 10% premium each for brand-name and free cash flow, and you get a fair value of about 16x. Remember, though, DIS stock is at 18x on trailing earnings. So for FY17, it’s probably fairly valued.
So jumping in here for the long-term makes some sense.
However, we always want to see if we might be able to improve on our entry point. Disney stock is about 11% off its recent lows of $92, which occurred in mid-October.
Last year, the stock ran from about $95 to $118 between August and November, in anticipation of The Force Awakens. Then it was “sell the news,” and the stock fell back to $90.
It’s possible a similar event is brewing, so here’s what I would do. Buy in your full intended allotment now. Or buy half now, then either wait to buy the other half below $97, or sell the Jan. 27 $100 puts for $1.10. You’ll receive a $110 premium for selling the contract. If it fails to execute, you have effectively lowered the buy-in price of your initial purchase by $1.10 per 100 shares. If it does execute, you’ll effectively buy DIS stock at $98.90 per share.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he is long DIS. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
