Is It Time to Buy Walt Disney?

The main content for this article first appeared in the Seeking Alpha Marketplace service DGI Across North America, in which other stable, long-term companies were discussed.

Conservative investors should give Walt Disney (NYSE:DIS)  another look, as the stock has been consolidating and earnings catching up.

Disney World in Orlando

Disney World in Orlando

Walt Disney: The Business

Disney is a conglomerate of content. It owns Pixar (acquired in 2006), Marvel (2009), Lucasfilm (2012). And of course, Disney profits from its franchises via its theme parks, movies, and merchandises.

Recent News

In December 2017, Disney announced that it’ll acquire certain key 21st Century Fox assets. Here’s the press release and here is some additional info from NBC News. This will be a positive for Disney, as Fox has popular entertainment properties, including X-Men, Avatar, and The Simpsons. The acquisition could also lead to cost savings of more than $2 billion.

The Fox acquisition is expected to close by June 2018. From the Disney press release:

Prior to the close of the transaction, it is anticipated that 21st Century Fox will seek to complete its planned acquisition of the 61% of Sky it doesn’t already own. Sky is one of Europe’s most successful pay television and creative enterprises with innovative and high-quality direct-to-consumer platforms, resonant brands and a strong and respected leadership team.

However, Comcast (NASDAQ:CMCSA) has joined in on the bid for Sky. Perhaps the increased uncertainty around Sky is why Disney dipped recently.

The dip is a great opportunity to nibble some Disney. The stock now yields 1.6%, which is my minimum yield target for the stock. My conservative estimate is that the company has the capacity to grow its dividend at a rate of 7-10% for the next few years.

Profitability

Disney has been generating excellent returns. Since 2008, the last recession, Disney has maintained return on equity (“ROE”) of at least 10% and return on asset (“ROA”) of at least 5% every year. And we see a general uptrend. The positive trend has been helped by its acquisitions of Pixar, Marvel, and Lucasfilm.

Its trailing twelve month (“TTM”) ROE and ROA is ~25.3% and ~11.5%, which is impressive.

Valuation

At ~$103 per share, Disney trades at a price-to-earnings ratio (“P/E”) of ~16.4, which is a decent value for a wide-moat company that’s estimated to grow its earnings per share (“EPS”) by ~10.5% per year for the next 3-5 years. On a forward basis, Disney looks even more attractive at a forward P/E of <15.

Disney fundamental analysis graph March 2018

Notably, Disney has been trading in a sideways channel since 2015. And it looks like the trading range is tightening. Disney’s earnings are catching up to its sideways-trading share price, so eventually, Disney’s share price should respond higher.

Thomson Reuters (TSX:TRI)(NYSE:TRI) has a mean 12-month target of $120, which represents ~16% upside potential in the near term.

Summary

Disney is a great long-term investment for conservative investors. At ~$103 per share, the stock looks attractive on a forward-looking basis. If you’re looking for a bigger margin of safety, begin scaling in the stock at $90-100 per share.

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Disclosure: At the time of writing, I owned shares of Disney.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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