As Disney preps next act, stock could see $100

This image released by Disney shows Elsa the Snow Queen, voiced by Idina Menzel, in a scene from the animated feature "Frozen." Disney's animated adventure, "Frozen," took the No. 2 position, earning $28.9 million over the weekend and $248.4 million domestically after six weeks at the multiplex. "'Frozen' probably had the best release date of the year because they positioned themselves to completely dominate the family film marketplace over the holidays," said box-office analyst Paul Dergarabedian of Rentrak. "To be No. 2 in its sixth week is a total reflection of that." (AP Photo/Disney,File)
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This image released by Disney shows Elsa the Snow Queen, voiced by Idina Menzel, in a scene from the animated feature "Frozen." Disney's animated adventure, "Frozen," took the No. 2 position, earning $28.9 million over the weekend and $248.4 million domestically after six weeks at the multiplex. "'Frozen' probably had the best release date of the year because they positioned themselves to completely dominate the family film marketplace over the holidays," said box-office analyst Paul Dergarabedian of Rentrak. "To be No. 2 in its sixth week is a total reflection of that." (AP Photo/Disney,File)

Walt Disney Co. (DIS) has been enjoying a sort of endless winter of winning for nearly eight months, a charmed season for a company with plenty of magic moments marking its past. And rarely does a company have so much to look back on with pride and such an abundance of exciting things to anticipate.

When “Frozen” hit theaters the day before Thanksgiving, it touched off a global box-office bonanza, countless little-girl singalongs and a new Disney “franchise” – one of its handful of powerful stories and character sets to be leveraged across film, Broadway, consumer goods, theme-park rides and vacation cruises over many years.

The voices of the singing Scandinavian sisters Elsa and Anna were still echoing loudly across the globe when "Maleficent" and "Captain America: The Winter Soldier" were released by Disney; each sprinted past $600 million in global box-office receipts. Then, the FIFA World Cup began in the Brazilian winter, drawing stronger-than-hoped ratings for Disney’s ESPN network that will fatten ad revenue in an otherwise-slow patch of the calendar. (The U.S.-Belgium match last week had more viewers than the first game of last year’s World Series.)

Meantime, the company broadly introduced its smart-tech enabled MyMagic+ theme-park reservation and navigation tools. The result of years of heavy investment, the little bracelets allow for a more efficient, customized park experience, and have been generally embraced by Disney loyalists. Park spending per visitor was up 4% in the March quarter from a year earlier.

These windfalls are no flukes

Such windfalls are not flukes but the result of great entertainment assets getting on a good run. These successes have helped make Disney stock one of the five best performers in the Dow Jones Industrial Average, which passed 17,000 before the holiday weekend; its shares are up by more than 13% to a new all-time high above $86.

Disney has been on a roll for years, the stock soaring more than 250% since CEO Robert Iger took over in September 2005, compared to a 60% gain in the broad stock market. Walt Disney was named Yahoo Finance’s Company of the Year in 2013 for its strong operating results, unsurpassable brands, prudent capital management and excellent stock performance. In December, Iger described 2013 as “a payoff year” in which years of targeted investments, bold acquisitions and cultivation of distinctive content came to fruition. Yet he quickly added he expected it would be followed “by other, even bigger, payoff years.”

It seems the market agrees with this upbeat view, as investors fix their sights on a handful of avidly anticipated landmark new releases. With the shares justifiably beloved, though, the stock now trades at a stout valuation, exceeding 20-times current fiscal year forecast earnings and more than 18-times expected profits in the year ending September 2015. The stock is a good deal richer than the market and is above its traditional 10% premium to Disney’s Big Media counterparts, whose shares trade closer to 16-times forward earnings.

This sets the bar somewhat high for Disney to continue outdoing Wall Street expectations, though the elements and momentum are in place for the stock to plausibly make a run at $100 a share by sometime in fiscal 2015, as the prospect of Disney surpassing $5 a share in earnings by fiscal 2016 comes into view.

The road ahead

Come the fall, ESPN’s new SEC Network, dedicated to NCAA’s elite Southeastern Conference and its football-mad fans, gets rolling, on the way to a high-stakes series of major initiatives in 2015.

Next year gets warmed up with the release of a new film version of “Cinderella” in March. The massive multi-year construction of Shanghai Disneyland will culminate with its opening on December 15. And the new “Star Wars” film – the first since Disney’s shrewd acquisition of Lucasfilm in 2012 – will reach its huge and frenzied audience either in very late 2015 or early 2016 (the details are a matter of fervent speculation in the movie press.)

Given all the investor nervousness a while back about fractured business models for content creators in the age of Netflix Inc. (NFLX) and other a la carte, on-demand programming options, it’s interesting that the distributors in cable and satellite are nervously consolidating, while the value of compelling media content and brands has been confirmed by the market. And the status of sports  dominated by ESPN  as the most valuable and least vulnerable category of media content has been further validated by all the industry machinations.

Disney, as owner of one of the most enviable and enduring intellectual property brands, has been the greatest beneficiary of this collective investor realization. The key for investors today is how much optimism for Disney’s “Imagineering” factory and the slated new ventures is already baked into its share price.

Anthony DiClemente, analyst at Nomura Securities, has a $94 share-price target for Disney, and says he figures the chances for potential upside to Disney’s current profit trajectory – and by extension its stock price – are tied to three key factors: how much momentum MyMagic+ lends to the already strong parks results; the degree of media networks ad revenue gains from World Cup buzz and the SEC football launch; and the added help to the studio and consumer-products division from “Frozen”, “The Avengers” and “Star Wars.”

Hints about these profit drivers will probably dominate analysts’ handicapping of Disney’s next quarterly results, due in about a month, in the absence of other major company-specific swing factors. The ESPN game-rights slate is fairly settled, there are now minimal expectations applied to the videogame effort, and ABC television rankings, while improved, no longer move the needle much for investors.

The next significant drama surrounding Disney, indeed, might involve not a product or revenue trends but the question of who will succeed Iger, who at one point planned to retire next year but has agreed to stay on until 2016. Iger, an Apple Inc. (AAPL) board member who was a friend of Steve Jobs, no doubt has well-honed ideas on how to identify a successor to a superstar CEO.

They will be fascinating to hear as the decision point nears. But with so many high-stakes events on the way for Disney, for now it all seems on Wall Street to occupy a galaxy far, far away.

 

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