Will Disney Continue Its Magical Run in 2013?

All is well in the Magic Kingdom as Disney’s (NYSE:DIS) stock has surged since the beginning of the year—up almost 27 percent in the last six months. The mass media corporation reported impressive second quarter earnings back in May, with CEO Bob Iger citing "the strength of [Disney's] brands and the value of high-quality creative content" as the main catalysts for long-term growth. As we enter into the second half of 2013, will Disney continue to beat the market or is its 'magical' ride over? Let's use our CHEAT SHEET investment framework to decide whether Disney is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

2012 was a year Disney’s studio entertainment division likely wishes to forget. John Carter was arguably the biggest flop in company history; however, operating income from the company’s third-largest division grew from $84 million in the red to $118 million in Q2 year-over-year — an increase of $202 million. Barring anymore tragedies like John Carter, the future looks bright for Disney’s studio entertainment division. First, Iron Man 3 has just surpased the $1 billion earnings mark, from which Disney should continue to enjoy revenues for the next couple quarters. Second, 2015 will be a huge year for Disney at the box office. Disney recently acquired Marvel and Lucasfilm, and thus, acquired the rights to the wildly popular Star Wars and Avengers films. With the expected releases of Star Wars 7 and Avengers 2, as well as a Finding Nemo sequel in the works, Disney could see revenues of more than $2 billion from movies alone in 2015.

Disney’s media networks generated more than half of the company’s operating income in Q2 2013. ESPN, which comprises 75 percent of media network profits, dominates sports television with flagship programs like SportsCenter, and broadcasting rights on the year’s most viewed sports events. ESPN is relatively well-protected from potential competitors because it already has contracts in place with many professional and collegiate sports associations. Disney Channel also enjoys a unique position and competitive advantage because the company already owns the rights to many beloved characters in the pop culture canon. Company management expects media network profit margins to rise even more over the next several tears as it plans to introduce its namesake channel in more than 100 countries.

T = Technicals Are Mixed

Disney’s stock is currently trading around $63.75, above its 200-day moving average of $58.02, but below its 50-day moving average of $64.67. We can see that Disney has experienced a longer-term uptrend since it is trading above its 200-day moving average. After the stock hit a 52-week high of $67.89 on May 15, there was a slight retracement (a short-term downward correction followed by a return to the previous upward trend). The share price has since moved sideways. Investors should watch closely to see if the stock can break through its 50-day moving average—a good sign that investor sentiment is positive.

E = Earnings, Profit Margins, and Revenues are Increasing

Disney’s EPS numbers have increased in four of the last five quarters. Revenue growth is even more optimistic with five straight quarters of year-over-year sales increases. Additionally, Disney has maintained a steady gross profit margin, which has averaged around 20 percent for the last five quarters. With relatively high barriers to entry in many of Disney's core businesses and its strong brand equity, there is relatively low risk that Disney's strong earnings growth will deteriorate in the medium-term.

	2013 Q2	2013 Q1	2012 Q4	2012 Q3	2012 Q2
EPS YoY Growth	31.75%	-3.75%	17.34%	31.17%	28.58%
Revenue YoY Growth	9.61%	5.21%	3.42%	3.87%	6.08%
Gross Profit Margin	20.80%	18.45%	18.77%	26.70%	17.52%

 

Conclusion

While Disney is trading at a slightly higher price to earnings ratio relative to the S&P 500 (19.40 versus 18.67), its healthy future cash flow potential from both its media networks and its studio entertainment division, as well as its strong positioning in the marketplace, justify its price. Also, 25 percent of Disney's operating profits come from overseas operations, so emerging markets could be a future growth area for Disney. Short-term traders may want to look for a more attractive entry point as Disney is trading near its 52-week high, but for the long-term investor looking to buy an entertainment company, Disney is an OUTPERFORM.