Walt Disney: Strong Price Momentum Is A Warning Sign

| About: The Walt (DIS)

The share price of Walt Disney (NYSE:DIS) has appreciated by 49% over the past 12 months and just reached its 52-week high. I believe investors should be cautious at the current price level as the stock valuation appears to be frothy relative to the company fundamentals. My view is based on the following reasons:

1. Disney's forward P/E multiple is currently trading at a 20% premium over the same multiple of S&P 500 Index, which stands at 15.1x now (see chart below).

The market premium seems somewhat stretched provided that 1) Disney's market premium has averaged at just 9% since 2012; 2) the company's consensus five-year earnings growth estimate at 10.8% is higher than the average estimate of 8.2% for the S&P 500 companies, but the difference is not that significant; and 3) the stock's dividend yield at 1.1% is only a half of the average yield for the S&P 500 Index.

2. Disney's forward P/E and PEG multiples have expanded substantially by 32% and 51%, respectively, over the past 12 months (see charts above and below).

Nevertheless, the company's consensus revenue, EBITDA, and EPS estimates for the current and next fiscal years have only trended up slightly over the period. Further, Disney's consensus five-year earnings growth estimate has actually been lowered from 12.5% to 10.8% over the period (see charts below). As such, it would be difficult to justify the valuation expansion given the mediocre performance of the consensus estimates.

3. From a historical standpoint, Disney shares are somewhat expensive relative to the company's growth profile. The company's quarterly revenue, EBITDA, and EPS grow rates in the past three years demonstrate a slightly declining trend. The consensus estimates for the next few quarters only suggest a generally flat performance ahead (see chart below).

Yet, the stock's trailing P/E multiple has just reached its three-year high and is now 20% above its three-year historical average, indicating a somewhat pricey valuation (see chart below).

Despite the above concerns, there are still some reasons for existing shareholder to continue holding the stock:

1) Disney's fundamentals remain intact as the company just announced its recent quarterly performance that beats the consensus expectation due to robust theme park and box office performance.

2) The company has been able to maintain a solid capital return and profitability performance over the past three years (see charts below).

3) Despite the notable price run-up, the stock's forward PEG ratio of 1.7x is still 9% below the PEG ratio of the S&P 500 Index, which is at 1.8x.

4) The market still likes the stock. Of the total 29 stock ratings compiled by Thomson One, there are seven strong buy and 14 buy ratings. The sell-side's average one-year price target at $71.2 is 6.8% above the current share price. Given that Disney should command an approximately 9% cost of equity based on the capital asset pricing model (see chart below), the average price target implies that the stock is trading within its fair value range.

However, for the margin of safety reason, potential buyers should wait for a correction before pulling the trigger. Alternatively, investors may also consider selling out-of-money put options.

All charts are created by the author except for the consensus estimate tables, which are sourced from S&P Capital IQ, and all financial data used in the article and the charts is sourced from S&P Capital IQ unless otherwise specified.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DIS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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