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Much like the Miami Heat of the NBA, which Disney's (NYSE:DIS) subsidiaries, ABC and ESPN, feature on a regular basis, the entertainment giant has had a spectacular run in 2013. Its stock has risen 24% in the year-to-date, easily doubling the gains on the Dow Jones Industrial Average (up 12% YTD) and the S&P 500 (up 10.7% YTD), both of which count Disney among their components.

On May 7th, Disney is set to report its 2013 fiscal second quarter earnings and Wall Street is expecting it to post earnings of 76-cents per share, 31% higher than it did a year earlier. For the year, analysts predict that Disney will announce profits of $3.45 a share, for earnings growth of 12.4%. If so, this mark would easily top the 8.2% EPS growth expected of the S&P 500.

The strength of Disney can be seen in many areas: in its fiscal first quarter earnings report, it showed good performance from its broadcasting, theme park and consumer product divisions. Its broadcasting revenues were driven by higher advertising rates and greater online advertising revenue. It was also able to generate strong program sales from hits such as Revenge and Once Upon A Time. Meanwhile, its theme park guests spent more money, on average, at its newly expanded theme parks and resorts, while its investment in the Disney Fantasy cruise ship, which launched a year ago, added to its top line. Finally, with Disney leveraging brands from its Marvel subsidiary as well as its Cars franchise, merchandise licensing drove its consumer product revenues higher.

All of these developments should excite shareholders and it's no surprise that Disney stock leads the Dow in year-to-date performance together with Hewlett-Packard (NYSE:HPQ).

Two Reasons Why We Like Disney

With Disney riding high, investors may be wondering if there's more to come. In our view, Disney is likely to remain one of the Dow's best performers for the following reasons:

1. Robust Forward Revenue Growth. As mentioned, Disney is expected to see double-digit earnings growth in 2013. Beyond 2013, equity analysts are anticipating that Disney will witness earnings growth of 12.4% per annum over the next five years - that's a 29% improvement over its average rate of 9.7% in the prior five years - and is superior to the earnings growth rate of the S&P5 00.

It's not difficult to see why: its subsidiary, ESPN, which has among the best pricing power on cable, has seen strong ratings from its nationally-televised NFL and NBA broadcasts. It has also registered solid income from ESPN broadcast affiliates. Meanwhile, the soft studio revenues it reported in the first quarter (down 5% year-on-year) are likely to be reversed over the next two quarters with blockbusters such as Iron Man 3 premiering to strong reviews. Indeed, some are already saying that Iron Man 3 could exceed the billion-dollar take on the Avengers.

Down the road, Disney is likely to reap huge benefits from its acquisition of Lucasfilm; it has already announced plans to release new Star Wars movies beginning in 2015 that would complement Marvel Studios' "second wave" of film franchises that include new Avengers movies and Guardians of the Galaxy. It also recently got back the rights to its Daredevil film franchise, which had previously been held by 20th Century Fox.

All that said, Disney's forward earnings growth rate is 26% slower than its industry's 16.9% -- and also slower than that of rivals such as Time Warner (NYSE:TWX) and News Corp (NASDAQ:NWSA), which are forecasted to see earnings growth of 12.6% and 15.8%, respectively, over the next five years.

However, we believe that analysts are taking a wait-and-see approach with respect to Disney's acquisition of Lucasfilm and have not yet adjusted to forward earnings forecasts to consider the acquisition's impact on Disney's various operating lines.

This should also have a notable future impact on Disney's margins; presently, while Disney enjoys a more than respectable gross margin of 25%, it trails the 44% margin enjoyed by its peers. This is due to the fact that Disney has cash-intensive theme parks to run while its rivals do not. However, with the acquisition of Lucasfilm, Disney now has potentially lucrative merchandise licensing streams from toymakers, video game producers and publishers with which to offset the cash flow and margin drain from other parts of its operations.

Disney is also well-placed for the future - as Netflix (NASDAQ:NFLX) CEO Scott Hastings observed after his company's spectacular first quarter numbers were revealed - companies like ESPN that offer robust mobile experiences are likely to experience more viewership than previously. Disney already generates good revenues from online advertising so any expansion of viewership on its mobile platforms would be a welcome development.

2. Reasonable Valuation. Surprisingly, even after its strong run in the first trimester, Disney is trading at a 24% discount to its industry P/E at 20x earnings compared to 26.4x for its industry. This is more than offset by its price-to-sales, price-to-book and price-to-free cash flow ratios, all of which are trading at a premium to the industry average.

However, as we've already noted, unlike most of its rivals, Disney has higher operating costs - just keeping its various theme parks and cruise ship running causes a significant drain on its liquidity. Indeed, this is reflected in Disney's lower-than-average quick ratio of 0.7 and current ratio of 1.0. This has also kept Disney from paying a larger dividend: at a 1.2% dividend yield, it trails the S&P 500's average by 43%.

As mentioned, we expect this situation to improve in the coming years as Disney generates more revenue from its licensing operations. Moreover, given Disney's lower-than-average level of debt - its long-term debt-to-equity ratio is just 0.49 compared with the average S&P 500 company's 0.74 - its lack of extensive cash reserves is not particularly noteworthy. Indeed, given the vast scale of its operations, Disney should be given some credit for its cash efficiency.

Conclusion

All told, we believe that Disney offers a compelling mix of across-the-board earnings strength and good forward earnings prospects; that is, it's firing on nearly all cylinders and has assets that are likely to generate good income streams in the future, boosting its margins to levels closer to that of its competition. Meanwhile, Disney has a strong balance sheet and a deep inventory of intellectual property that it can leverage in the future should the need arise.

As such, investors can expect that Disney will have added a further 15% to 25% to its returns before the year is done.

Source: There's Still Magic In This Entertainment Giant

Additional disclosure: Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.