Disney (NYSE:DIS) stock has moved up significantly from its mid-March lows. But so far this year, DIS stock is still down 18% from where it ended last year at $145. However, it’s likely the stock could get cheaper, at least in the near term.
One problem is that a lot of good news is already baked into the stock price. For example, the average analyst estimate for DIS stock is for $1.36 in earnings this year. That puts the stock at a very high price-earnings ratio of 87 times.
Moreover, even though the average estimate from 27 analysts for 2021 is for $2.98 per share in earnings, the P/E ratio is still very high. Using the price from July 17, the 2021 P/E ratio is still a loft 38 times earnings. The market is obviously assuming earnings will continue to move higher in 2022, two years out.
What Analysts Think About Disney
Barron’s Teresa Rivas recently wrote that analysts believe the recent reopening of Disney’s theme parks is a good development. It could lead to a quicker recovery for the company’s finances. JPMorgan Chase put a “buy” rating on the stock and set its target at $135 per share. That target is 13.7% above today’s price.
Others are excited that Disney+ — the new online streaming service — has taken off much faster than expected. The $6.99 monthly subscription service has now got over 54 million subscribers worldwide. Originally the company was hoping to get 60 million to 90 million subs by the end of 2024. Some are now even wondering if the company could hit 100 million subs by the end of 2020.
Another well-known analyst, Jessica Reif Ehrlich of BofA Merrill Lynch, says DIS stock is worth $146 per share, according to Barron’s. She also highlights the contribution that ESPN will make for the company once sports activities reactivate around the world. Of course, its movie theater releases that will probably not debut until 2021 will be another catalyst for Disney’s growth.
It seems all of Wall Street likes DIS stock. Goldman Sachs just reiterated its “buy” recommendation with a $137 price target as well.
But I get nervous when Wall Street is saying the same thing, especially with the stock at near-term highs, and at such a high P/E ratio. Maybe not all the bad news has occurred yet.
Potential Negative Catalysts for DIS Stock
One analyst at S.G. Cowen thinks Disney’s parks and movie business will take longer to return to profitability. This analyst lowered his price target to $97 from $101. Both of those target prices are below today’s price, so he must be expecting DIS stock to fall. If any of the other theme parks follow Hong Kong’s lead and are forced to close again, DIS stock could take another hit.
For example, according to Seeking Alpha, the Cowen analyst believes that theaters and theme parks won’t be profitable until 2021. In addition, the cruise line business is out of commission for most of 2020. Moreover, movie theaters won’t likely open until 2021 as well.
It is not clear when the company will be able to reinstate its dividend to shareholders. This is an important part of every company’s total return formula for shareholders. It also signals that the company has plenty of cash flow to pay the dividend.
What Should You Do With DIS Stock?
If you already own the stock, you are probably not willing to sell it just yet, especially since it is down for the year so far. This means it might be a good opportunity to average cost into your holdings if the stock should take a tumble from here.
If you are not yet a Disney shareholder, it may be psychologically hard to start a position. DIS stock has already moved up from its lows and still has a high P/E ratio. Moreover, sometimes it pays to be a contrarian when everyone is recommending the stock.
In this case, to invest in Disney, you have to recognize that it is in a turnaround situation. There are significant risks if the company’s revenue and earnings do not reappear as forecast by analysts. And it’s not as if you are getting a bargain price to ameliorate that risk, even though some analysts might disagree with that view.
Disney’s second-quarter results will be released on Aug. 4, after the close of the market. So you have some time to decide whether you want to wait and hear management’s outlook. Keep in mind that often the stock moves up ahead of earnings and sells off on the news.
So be careful when you invest in DIS stock. You might want to wait for the stock to get cheaper before you sign up. Make sure you plan to average cost into your holdings over a period of time.