Will Walt Disney Co Stock Fall Below $90?

  • Walt Disney Co. stock has been the biggest laggard on the dow 30 so far in 2016.
  • The stock, supported by strong fundamentals, is currently trading at extremely attractive valuation levels.
  • Is it time to buy into the stock?

Walt Disney Co. (NYSE:DIS) stock is the biggest laggard among the Dow 30 stocks in the year-to-date. The entertainment giant's stock price is down by 12.05% in the year-to-date and has underperformed the Dow Jones Industrial Average (INDX:INDU) by nearly 16% (as on Sep 9 close). If the stock continues along its current trajectory, the Walt Disney Co. stock is set to become the worst performer among the DOW component stocks. This will be a first, since the introduction of the stock into the index, way back in 1991.

INDU stock chart

Source: Disney stock price chart by amigobulls.com

Given the current trajectory of the stock, it will be a brave call for any investors to buy into the Walt Disney stock. A buy into this fall would be a contrarian move for sure, but does it qualify as a smart one too? Does the Walt Disney stock present a good buy for the contrarian investor? Let's understand this by looking at the fundamentals and charts.

ESPN performance

A popular topic of debate, among investors and analysts alike, has been the performance of Disney's ESPN division. Such has been the magnitude of worries at ESPN that it has drowned out the strong performance of the other divisions of the company. However, the company has made a few moves which will make sure to offset the worries around ESPN.

Also read: ESPN Is Not A Risk For Walt Disney Stock

The Walt Disney Co. recently acquired a 33% stake in BAMTech, an online streaming service. Quoting Robert A. Iger, Chairman and CEO of Walt Disney Co, from the Q3 2016 earnings call:

We're acquiring a 33% stake in BAM Tech, the industry leader in video streaming, data analytics and commerce management. We have the option to acquire majority ownership in the future, and through this investment, we plan to launch a new direct-to-consumer ESPN-branded, multi-sports subscription streaming service.

Also given the fact that cord cutting could well be flattening out, ESPN's performance should be less of a worry. Both of these facts were pointed out in a recent post titled, "3 reasons Why Walt Disney Stock Is A Good Buy" and so, we won't spend more time going into further details here. All in all, Disney is taking solid steps to protect a revenue segment which accounts for close to 40% of its overall revenue, and this is definitely a fact which will be cheered by Walt Disney investors in the quarters to come.

Studios And Theme Parks Performance.

The studios and theme parks segments have been the drivers of Disney's growth in 2016. While the studio division has been the standout segment, with a 37% YoY growth in the first 9 months of FY 2016 (Fiscal ending Sep 2016), it will likely be the parks and resorts segment which could really boost Disney's performance in the coming quarters.

Also read: Theme Parks Will Be A Key Driver For Walt Disney Co Stock

The segment could get a major boost from the June opening of the Disneyland Shanghai. Over 1 million visitors, 95% hotel occupancy rate, and 70 million people watching the opening ceremony (as discussed on Q3 earnings call) are numbers which could have a significant positive impact on Disney financials in the coming quarters. The visitor flow could increase post summer if we were to infer from the Q3 earnings call. Quoting the CEO:

We expected in opening that a large part of the visitation would come from Shanghai, and actually we've been surprised that the visitation from the rest of China has been as strong as it has been, because our concentration from a marketing perspective was largely in the local region. But it's come from all over China.

One factor could be that Shanghai is a tourist destination for the rest of China, particularly in the summer, and that people from Shanghai are waiting for the tourist season to end before they visit. Now our visitation from Shanghai has also been strong. We did some research and there was 98% awareness of the park among the people in Shanghai and well over 70% intent to visit from the people in Shanghai.

So investors should closely track the performance of this segment in Disney's quarterly earnings reports.

The Walt Disney Co. Stock Is Battered - Valuations Reflect That

The Walt Disney CO. stock is trading at a PE ratio of 16.6, based on the latest closing price (Sep 9). That's down from a 20 plus earnings multiple a year ago. The Disney stock has traded at an average PE ratio of 19.5 over the last 5 years, which highlights the recent battering the stock has received in the market.

Analysts estimate Disney earnings to grow at a CAGR of 19.2% over the next 5 years, as per Yahoo Finance. that puts the forward PEG at  0.86, which is a pretty attractive valuation.

Given the seemingly low valuation multiple and the attractive fundamentals, it is clear that the current decline in Disney stock price is unwarranted and hence, the stock is an attractive buy for the long term. However, is now the right time to buy the stock? Since the stock is headed lower, should you wait and buy? A look at the technical charts should help us answer this

Technicals  Point To Short Term Decline

A look at the technical chart (below) throws up 2 concerns. The formation of a descending triangle pattern and the flattening out of the 50 period moving average on the weekly chart.

Disney stock technical chart

Source: stockcharts.com

A descending triangle is usually a bearish pattern and Disney stock could breakout below the support at $90 level. The next support is only at $81 level, which is a full 10% below the current support. Hence, investors should wait and watch to see if the stock breaches the $90 level.

Just in case the stock moves higher, it will have to pass the $100 level (previous peak in the triangle formation) to confirm that the bearish pattern will not complete. While the long term trend (200 period moving average) is still up, the short term trend is a reason for concern. Hence, investors should wait and watch for a breakout (in either direction) before deciding an entry into the stock.

Conclusion

The Walt Disney CO. stock has been battered in the year-to-date. This is reflected in its current valuations, which appear to be extremely attractive. Given the strong long-term uptrend in technicals and the strong fundamentals, Disney stock is definitely a good long term play. However, the technicals indicate further decline in the short term. Hence, investors should wait for a potentially lower entry point which could occur over the coming sessions.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and DIS stock

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loveprotocal
bullish
Monday night football debuting with two games and baseball playoffs fast approaching, the top four selling Blue Rays right now with Finding Dory being released soon, Election advertising and election coverage in high gear with the election a month and a half away, Two Star Wars Films coming out in the next 8 months along with Guardians of the Galaxy 2, followed shortly after by Pirates of the Caribbean Dead Men Tell No Tales and Cars 3. Gas and fuel prices still at all time lows when fall/winter traveling to warmer climates kicks in and thus Disney Resorts. Now is the Time to Buy!
2 reply
user profile picture
loveprotocal
bullish
Two Stars wars in the next 15 months, Pirates of Caribbean will take the Memorial day weekend slot. It will be out in December 2017, it got moved back to that date. We are only three months away From Star Wars Rogue One, with Marvels Dr. Strange and a New Disney Princess Moanna coming out in the months prior to it.
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