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Last October, when shares of Walt Disney (NYSE:DIS) were selling for about $48 a share, I recommended purchase of the stock for several reasons:

  • Revenues and profit margins were steady throughout the worst of the crash and improved swiftly thereafter;
  • The company has been cutting debt and has solid interest coverage of nearly 20x EBIT.
  • At 18x times trailing earnings the company was near the lower end of recent historical multiples.
  • Disney's' cash flow multiple, around 10x when I wrote the article, was comfortably below its historical average of 12x.

Cranking estimates of 2013 earnings per share obtained from Yahoo Finance, Etrade, and the Value Line Investment Survey, times a more generous PE of 21x, I obtained a target price for the stock: the low 70s. A similar process with the historical cash flow multiple, gave a price of $60. I blended these $60 and $70 price estimates to obtain a price objective of $65 a share by the end of 2013. At that time this was a comfortable 30% gain in price for a very high-quality blue chip, and member of the Dow Jones Industrial Average (and its SPDR ETF, DIA). An extra dividend payment in December of last year ($0.75) supplemented the traditional March payment ($0.60 a year ago, but growing steadily); a nice sweetener.

Now that the price has risen to $67 a share, just above my price objective in last year's article, what is an investor to do? As always it depends in large part on whether you are a long-term buy-and-hold investor, or a more aggressive trader (though not a day trader or technician).

First let's have a look at a recent chart and go through the same valuation technique we did above.

(click to enlarge)

Next year's earnings estimates are $3.90 (from Value Line) and $3.92 (from Yahoo Finance). I stand by my 21x earnings multiple from last year, having already allowed multiple expansion based upon better company performance and stability. That gives us a price of $82.11 for the share price 12 months from now.

Using cash flow, Value Line estimates $5.35 for 2014; Etrade estimates are bit lower, $5.25. I'll use the more conservative figure and stick with 12x as a cash flow multiple: this gives us a target price of $63. Again, there may be reason to believe that Disney's cash flow multiple may also expand: but for now we will stick to $63 as our second estimate and, blending the two prices, suggest a target value for Disney about $73 or so.

Selling at $67 a share at the time this article is written, this gives the investor a potential profit of about 9%.

Last year the projected gain was more than twice as much. Alas, the strength in Disney has led to prospective gains not remarkably greater than those of an index-based ETF such as SPDRs DIA and SPY. What should an investor do?

Charts have some value at times like this. Notice the substantial resistance DIS has encountered at $68 a share in the last few months. As the broad market has neared 2013 highs, so has Disney. But notice the strong volume on the recent advance, which suggests that institutions and others are loading up on the shares.

(click to enlarge)

Could it be the success of "Iron Man 3" will be eclipsed by "THOR, The Dark World?" Or maybe the company's announcement a few days ago that it was buying back $8 billion of i's own shares (Bloomberg, 09/13/2013).

The market is strong, and leaders like Disney may well take charge on the breakout. I encourage long-term Disney shareholders to wait for this situation to resolve itself. You can always place a stop loss order a bit below the current price to protect yourself.

More savvy traders might want to use options or other hedging strategies to protect their gains. With the implied volatility of DIS options near traditional historical lows, buying a protective put is an attractive strategy.

(click to enlarge)

source: www.ivolatility.com

Source: Disney Now Fully Valued: 1-Year Follow Up

Additional disclosure: I am long DIS through my position in DIA, the Exchange Traded Fund for the Dow Jones Industrials.