Disney Upgraded, It’s Time To Buy This Dip

Way Too Much Selling, Not Enough Thinking

An upgrade for Disney (DIS) from Atlantic Equities is shining the light on a great value investment; The Disney Company. The firm acknowledges Disney will take a hit from the virus but says the selling is overblown. At current levels, even with the expected impact on revenue, Disney is a buy. They set their price target at $119, about 24% above today’s price, but I think that is a conservative estimate and does not value the iconic brand highly enough. There is going to be an economic rebound and when it happens it’s brands like Disney that will see a lion’s share of consumer dollars.

The Analysts Are Bullish

The average analyst’s rating is a solid buy. Fully 19 of the 25 sell-side ratings are a buy with the remainder hold or neutral. While most have lowered their price targets, the downward revisions have been outpaced by the decline in share prices. Guggenheim is the only sell-side analyst to have downgraded the stock and that to hold.

Looking forward, the community is still expecting solid growth from Disney. The company is going to take a hit to revenue and earnings across most segments this year but the rebound should be very strong. Revenue is still expected to grow for the year, about 14.5%, with that slowing to a CAGR in the high-single digits for the next decade.

Earnings are where Disney is really shining. The company has been leveraging its platforms well and delivering double-digit increases on a regular basis. This year the trend will pause, earnings will decline across the enterprise by roughly 20%, but once again the rebound is expected to be strong. EPS growth on a YOY basis is expected to resume as soon as next year and run at a +15% CAGR until 2030 at least.

A Blue Chip Growth Stock Trading At A Deep Value

Growth and Blue Chip don’t always go together but in this case, they do. While Disney is not immune to the virus it does have a well-established brand that can weather this crisis. The 20X forward earnings the stock trades may not seem like such a value considering the correction we’ve just experienced but, consider this. Disney stock is down 40% from the high it set at the end of 2019 and trading at a +3-year low. There may never be a time to buy this stock so cheaply ever again.

Mega-cap peers are all trading at or above this valuation as well so there is a comparison to be made. Facebook (FB) and Apple (AAPL) are both trading about 19.5X forward earnings and both these companies are feeling a sting from the virus. Microsoft (MSFT) trades at 28X times earnings while Amazon (AMZN) and Netflix (NFLX) are both trading at lofty levels about 60X forward earnings suggesting The Walt Disney Company could undergo a substantial multiple expansion once the viral threat begins to pass.

The Cherry On Top, You Get A Dividend

One of the striking differences between The Disney Company and its blue-chip growth peers is the dividend. Only two of the five other names mentioned even pay a dividend and that well below Disney’s 1.85%. Disney’s distribution is relatively safe with a payout ratio of 37% of 2020’s expected earnings. There is some risk, I don’t want to be misleading, but cash on hand, a low level of debt and expected earnings provide a backstop that should hold the company until later in the year.

The Technical Outlook: The Bottom May Be In But We’re Not Out Of The Woods Yet

Disney’s plunge began well before the coronavirus pandemic began. The stock fell more than 12% from its late 2019 high but had begun to stabilize when the broader correction began. Since then, the stock has fallen to hit a +3-year low and is making a nice looking bounce. Price action has tested the low and appears to be confirming support but the danger isn’t over; we might see another retest of support and/or the recently set low.

The indicators are a bit of a conundrum right now. The way they are set up momentum is bullish and stochastic is bearish suggesting either could confirm the other. From the perspective of bottoming and potential for reversal, the indicators are set up to fire a solid buy signal should price action move higher. If the price action does move higher the first major hurdle will be the short-term moving average and resistance in the range of $106 to $108.

Longer-term, I see this stock moving above the EMA and rallying into the end of the year. The most obvious target is the 2020 highs near $150 which suggests a 50% upside is possible once the virus threat passes.