The Force may be strong for shares of Walt Disney Co (DIS), which recently moved up more than 1% amid a healthy recovery in the underlying Dow Jones Industrial Average.
Investors are anticipating better-than-average results ahead of Disney earnings for the fourth quarter of fiscal year 2015. Top-line sales are forecasted by analysts to improve on a year-over-year basis as Disney stock investors hope to exceed an ambitious earnings per share target of $1.14.
However, the real story for DIS is the hugely anticipated release of Star Wars: Episode VII — The Force Awakens.
Hollywood insiders are predicting that the latest iteration will rake in $615 million for its worldwide opening — a record-breaking figure should the forecast hold true.
Early indications suggest that this lofty target is well within reach. The Force Awakens is expected to play in at least 10,000 screens across more than 4,000 theaters in the U.S., placing the film in the prime winter season of heavy consumer foot traffic. Even the official trailer for the movie has garnered over 54 million views in the space of a mere two weeks.
Understandably, Disney stock investors are eagerly anticipating rip-roaring ticket sales and the exponential opportunity that the Star Wars brand name can offer, but will this momentum be enough to push DIS forward?
Disney Stock Isn’t a “Sure Thing”
At its current valuation in the markets, Disney stock’s trailing price earnings ratio is roughly 15% above its industry average, one that has been gutted in recent years. Another point of concern is that while DIS shares are up over 22% year-to-date, it’s still 5.5% below its August high. And as the broad markets began a recovery in late September, Disney stock’s velocity has somewhat sputtered in recent trades.
Clouding matters further is the historical performance of Disney earnings during Q4, which is typically one of the softer quarters for the year. This is evidenced quite clearly by the fact that in the past four years, Disney earnings in Q4 produced an average beat against Wall Street expectations of only 0.44%.
This contrasts sharply against total averages of 7% since Q1 FY2012. Yet analysts overwhelmingly believe that DIS can meet or exceed its current Q4 EPS target, which is 28% higher than last year’s Q4 target of 89 cents.
The main concern isn’t that DIS has a significant flaw — the iconic company’s broadly diversified asset base and universal brand name recognition ensures us that it will likely remain at the top of the food chain for decades to come. However, will Disney stock continue to provide the returns and growth potential that will satisfy the influx of investment capital?
If straight numbers are anything to go by, they are not necessarily convincing, which suggests that Wall Street may be expecting a bit too much fanfare from Disney earnings.
Should the markets gift DIS with parity against its EPS target, this would represent a lift of 31% year-over-year, a magnitude of which has not been seen in quite some time. In addition, the aggressive estimate is reflective of a mere 9.4% increase in Q4’s YOY revenue, with net margins that are growing at a relatively modest pace.
Although Disney stock does tend to react well after an earnings release — averaging a 2% lift 30 days following a release date since Q1 FY2012 — recent data has upset that trend. In the wake of a revenue miss for Q3 FY2015, DIS was down more than 16% a month later, which then brought about a surge of negative sentiment from financial analysts.
Now, many of these same analysts would have you believe that Disney stock is a screaming buy.
Despite being one of the most recognizable companies in the world, it’s clear that not everything in DIS’ vast portfolio has the Magic Kingdom touch. Both revenue and net income trends are likely to continue on its upward climb based on historically consistent performances.
However, anticipating too much from Disney stock could be a flawed move, especially since growth rates don’t justify exuberance.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
