Disney Downgrade. Is the stock overvalued?
Walt Disney (DIS) received a downgrade today from Imperial Capital in relation to its "record valuation." The analyst didn't go bearish on the stock. His price target was still $147. He simply downed the stock from "outperform."
It's true, Disney stock has had quite a climb this year. Year-to-date, the stock is up over 28% compared to the S&P 500's 15.56%. I've always liked Disney, and view the company as a better investment into media and the burgeoning streaming industry in comparison to names like Netflix (NFLX) . I don't own DIS, but may take a position in the near future.
Long- and short-term value
If you're looking on a shorter-time horizon, you could make a good argument that Disney stock might have some cooling in its future due in large part to how hot the stock has been in the last six months. More short-term shareholders might be looking at the gains they've made, and start considering locking them in. There's also the market volatility as a whole to consider. Analysts, bankers, investors, everyone is trying to gauge the next recession and or correction. Indeed, we're late in an economic cycle that's gone on for a decade. The next recession will assuredly hit all equities to some degree. To that end, I can see getting a little cautious on Disney's current highs.
The long-term potential
From that view, it certainly seems reasonable to trim positions on highs. But if you're in it for the long term, Disney remains one of the most promising names in my opinion. Since the year 2000, Disney stock has grown at more than double the rate of the S&P 500. The company has a time-proven record of monetizing media entertainment in a way that very few can compete with. Moving forward, Disney not only has its traditional avenues of business, but its foray into streaming has the potential to be huge.
A great deal of attention has been given to the recent success of the "Avengers" film series finale, along with the new "Aladdin" movie, which has grossed $725 million thus far. Moreover, Disney has the third installment in the "Star Wars" reboot coming out this fall. For me, the biggest potential for new areas to expand is within its ownership of Hulu, and the upcoming "Disney+" streaming service. The company has control of the box office. It knows exactly how to make content that audiences will enjoy. There's no question about that. By having its own streaming services, Disney can control the way its content reaches consumers. By no longer needing names like Netflix to get their content streamed, they're cutting out the middleman, and getting direct access to the customer.
Analyst estimates for the full year have earnings per share of around $6.42. That would mean the stock is currently trading around 21.8x full-year earnings. When you compare Disney, with all of its big financial successes and track record, with a name like Netflix that trades at around 100x full-year estimates, you have to wonder what "valuation" means these days.
Is there a short-term chance of a pullback from the aggressive stock performance this year? Yes, and I think it should be taken advantage of. If you're investing for the long term, Disney remains a great name for the portfolio. Any short term weakness might simply present opportunities for increasing one's position. Over the next few years, we'll likely see the streaming war heat up among the big-content names. I want to see what Disney can do in that space. If downgrades create an opportunity here, I'm considering a position.
Walt Disney is a holding in Jim Cramer's Action Alerts PLUS member club.