Disney - Welcome to Fantasyland

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Feb 11, 2015
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Disney: A Fantasyland Valuation

The Price of Admission is Much Too High

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Paying too much for a stock with good news is a common investment error. Ignoring historical valuations almost always becomes a costly practice. That applies more than ever when short-term events have been spectacularly wonderful.

Media content and theme park operator Disney (DIS, Financial) hit a surprise home run with the animated movie Frozen. Worldwide box office blew through projections and ancillary merchandise sales plus license agreements pushed adjusted fiscal Q1 (ended Dec. 31, 2014) to $1.27 versus $1.03 estimates.

On Feb. 5, 2015, Disney shares jumped to an all-time high of $102.99.

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What will Disney do for an encore? It will be very tough to come up with another blockbuster of equal earnings power, making forward comparisons get very tough. Contributions from Frozen appear to be more than fully priced into the shares.

The stock now trades for north of, already raised, 21x FY 2015 estimates. Bulls on the stock think this is a great buy point. I’ve seen one year targets ranging from $120 - $180 come out lately. Hitting those levels would require DIS to run to 25x – 37X this year’s, optimistic titling projection for $4.82 in FY 2015 (ends Oct. 3, 2015) EPS.

Are those reasonable goals?

Not if you study Disney’s actual trading history.

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Disney’s typical P/E over the most recent seven years was just 15.3x. Its average yield since the start of 2008 was 1.21%. The recent peak came at a 39% premium to the normalized multiple and carried a 9.2% lower-than-typical yield.

Buy-and-hold types who failed to sell near 2008’s peak suffered through a 57% drawdown in early 2009. They had to wait more than three years to get permanently back above 2008’s pinnacle.

Buyers at the early 2011 top could have stepped into DIS cheaper about 17-months later. Neither of those ‘should have sold’ periods was even close to as overvalued as where Disney was sitting one week ago.

Setting a price target requires assumptions. In calculating their 3-5 year view, Value Line assumed a slightly above average, 16x P/E, while allowing for substantial growth, to $6.50 in EPS, by 2019. Even then, long-term appreciation potential appeared unattractive.

Note that those 3 - 5 year projections were from Disney's $93.97 quote as of Value Line's full page report's late January publication date.

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If Disney can hit its now upwardly revised, FY 2016, profit forecast of $5.53 that same P/E would only support an $88.50 price tag a year from now.

Value-oriented investors were able to buy into DIS at sub-15x P/Es during parts of each calendar year from 2008 through 2013. When it was clearly bargain-priced DIS paid current yields of 1.42% - 2.32%. The recent dividend, at Wednesday’s price of $101.71, offered just 1.13%.

Research outfit Morningstar carries a neutral rating on Disney, but notes its ‘fair value’ estimate is just $95.

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Why be the sucker that pays more for the same merchandise than anyone else did over the last seven years?

The Magic Kingdom is very unlikely to provide magical returns for buyers near its recent quote.

If you own Disney, consider taking profits. Those tempted to play on momentum, after the run-up from last year’s low of $70.37, should wait for a significant pullback rather than paying today’s very stiff price of admission.

Disclosure: No position