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Disney: An American Icon
09/16/2015 7:00 am EST
Our latest featured recommendation takes advantage of a recent substantial pullback in an American icon and one of the world’s great media companies, explains Nicholas Vardy, editor of The Alpha Investor Letter.
I believe the recent pullback in The Walt Disney Company (DIS) has been a huge overreaction. The cause? Disney’s most recent earnings report revealed a long-expected drop in subscriber levels at its flagship cable sports channel, ESPN.
ESPN is the world’s most profitable cable network and it accounts for 56% of Disney’s total profits.
However, Disney is well positioned with cable operators with ESPN commanding the highest affiliate fees on cable. Contractual gains in affiliate fees in the coming years will help offset more cord-cutting households.
Meanwhile, what was lost in the din around the company’s earnings announcement was that fiscal third-quarter results were ahead of expectations. Disney topped profit estimates for an eleventh straight quarter.
Of course, Disney is about a lot more than ESPN. Its business segments include Media Networks, Parks & Resorts, Studio Entertainment, Consumer Products, and Interactive.
And with the release of another Star Wars epic at Christmas, Disney’s three-year winning streak is in no danger of ending.
However, Disney is not content to wait until Christmas to open its presents; it will begin selling its new line of Star Wars merchandise.
It is notable that Disney toys for the movie Frozen made $531 million last year and Star Wars is sure to sell more than that. Star Wars toy sales have topped $12 billion, looking back to the franchise’s debut in 1978 and through 2011.
Disney seems like a bargain. After its recent drop, Disney now trades at a price-to-earnings ratio of 19.
Analysts expect Disney will grow earnings per share by 16% this year, to $5.03, and 13% next year, to $5.67.
Buying Disney’s stock today is a terrific way to take advantage of Mr. Market’s Mood swings, an overreaction of market sentiment by investors scared out of Disney’s stock for all the wrong reasons.
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