We know most of the headaches for Walt Disney Co (NYSE:DIS). Concerns over cord-cutting trends, thanks to Netflix, Inc. (NASDAQ:NFLX), subscriber losses at ESPN, the merger with Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA) and the possible head-to-head with Comcast Corporation (NASDAQ:CMCSA) over Sky are the main ones. As a result, the once-dominant DIS stock has hit a major hurdle.
In fact, in late-2011 DIS stock was trading near $27 per share. So while shares are about flat over the past three years, long-term investors — even intermediate term investors — are still sitting on massive gains.
But that’s not the question we’re facing now. Right now we’re trying to decide whether Disney is a buy.
Walt Disney Co as a Whole
Media networks made up a little more than 40% of Disney revenue in fiscal 2017. That’s thanks to both studio revenue and consumer products each falling more than 10% for the year.
When we diversify our portfolio, sometimes we have our big winners weighed down by a few losers. Other times, a few stalwarts carry our overall holdings through a tough period and stymie some of the big losses we would have had if we were more concentrated in certain sectors or industries.
Disney is the same way. While studio and consumer products had a down year, combined with parks and resort, they made up about 60% of Disney’s overall sales. While media network revenue only fell 1% for the year — a small figure that many seem to blow out of proportion — there’s still a lot of other business to account for.
First, its studio division should have a great year as Black Panther had one of the best showings of all time. Not many analysts were looking for that kind of turnout. New Avengers, Star Wars and Incredibles movies will release this year. 2019 should be even better, with Frozen 2, Toy Story 4, live-action Lion King and Aladdin and Captain Marvel all hitting the screens — plus another Star Wars and Avengers movie.
Parks remain jam-packed and as long as the economy remains healthy — which it is — then attendance should remain high. That should continue to pad Disney’s bottom line. While it’s unclear how long Disney can continue raising ticket prices, it’s not feeling a significant backlash yet.
Evaluating DIS Stock
One of the more attractive catalysts for DIS stock is the valuation. Trading at just 14.6 times this year’s earnings estimates, Disney is far from expensive. Based on 2019 estimates, DIS stock trades at just 13.5 times earnings — again, hardly a premium price.
Depending on Disney’s growth rate though, these valuation levels can either be expensive or a bargain. Analysts expect the House of Mouse to grow earnings by about 21% this year, followed by almost 9% growth next year. Revenue estimates call for 6.1% growth this year and another — admittedly somewhat disappointing — 2.6% growth in 2019.
Given these growth rates, we can comfortably say that Disney is not overvalued at current levels. While not massive, it’s also worth pointing out Disney’s 1.65% dividend yield as well. Because management was committed to upping this payout over the years, Disney landed itself on my Future Blue Chips list about five years ago. But it needs to get that payout up if it wants to stay there.
Trading DIS Stock
The DIS stock chart may be near a critical area. While the $100 level did not hold up as support for a few months in the fall, it has been a critical level over the past year. However, shares have a sharp downtrend line (in black) weighing on DIS stock price. Have a look for yourself:
Click to Enlarge
If DIS stock can break through this downtrend line of resistance, it will open the stock up to higher prices. Remember, just earlier this year, shares were trading near $113, which would represent a rally of about 13% from current levels. Based on the RSI (yellow box up top) and MACD (blue box at the bottom of the chart), they also suggest the downside could be limited in DIS stock.
One last bullish piece to consider? Analysts. The lowest price target on Wall Street calls for a decline to $94, a drop of just 7%. However, the average price target sits at almost $115, while the Street-high target calls for a 32% rally to $134.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in DIS.
