Personal Finance
DIS

Will Disney Dominate the Media Space? 1 Analyst Thinks So

A man holding two records up like mouse ears

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Investors are not happy with Walt Disney (NYSE: DIS) stock.

Over the past year, Disney shares have gained only 8% versus an overall gain of 13% on the S&P 500 . Nearly all of that underperformance can be tracked back to just one event -- Disney's announcement on Aug. 8 that it will more than double its initial $1 billion stake in video streaming company BAMTech by investing a further $1.6 billion to take a controlling 75% interest in the company. When Disney made that announcement, the stock quickly fell 4%, or nearly the entire amount by which it has underperformed the S&P 500 over the past year.

But here are three things you need to know.

A man holding two records up like mouse ears

Wall Street is nervous about Disney's latest big deal -- but one banker sings a different tune. Image source: Getty Images.

1. Wells Fargo joins the Mickey Mouse fan club

This morning, banker Wells Fargo announced it is upgrading Disney stock from market perform to outperform and raising its price target on Disney stock to $116. Calculated from today's starting price of $102, that works out to a 14% anticipated profit on Disney stock -- plus another 1.5% from Disney's dividend.

Counting Wells, S&P Global Market Intelligence calculates that 17 analysts total now have buy or outperform ratings on Disney stock -- versus just four analysts who counsel selling. At the same time, though, 11 analysts are hedging their bets and rating Disney a hold or neutral.

2. Why Wells likes Disney

What has Wells Fargo feeling so excited about Disney stock, when others are on the fence? Well, while other investors were backing away, Wells says it has "had time to digest BAMTech & the related streaming apps & think the Street's negativity is overdone."

Analysts such as BMO Capital, for example, have criticized Disney's move to increase its investment in BAMTech and cut its ties with Netflix , while Jefferies warned that the acquisition of BAMTech would cause Disney stock to "respond negatively." In a note covered on StreetInsider.com today, however, Wells explains that it doesn't think Disney will suffer any more than "modest dilution" from absorbing BAMTech. Calling Wall Street's worries "widely overdone," Wells sees Disney cutting costs elsewhere in its business (e.g., at ABC) to make back the money it is spending on BAM.

3. Gloomy sentiment with a silver lining

At the same time, Wells Fargo notes that thanks to investors "responding negatively," as Jefferies put it, Disney stock now trades for just over 15 times forward earnings. But "DIS doesn't tend to stay at 15x for long," says Wells. That's why Wells says that today's share price of $102 and change marks a good "entry point" for investors who have been looking for a chance to buy Disney. According to the analyst, Disney has made a smart decision to distance itself from streaming giants like Netflix, and strike out on its own as a pioneer in "over-the-top," direct-to-viewer delivery of content via apps.

"While we might be early," admits Wells, "we view the risk/reward as heavily skewed to the upside."

The most important thing: How high up is the upside here?

Probably Wells Fargo's most interesting observation is how Disney -- a company with a 94-year history behind it -- has rarely traded for valuations of 15 times forward earnings or less.

While S&P Global doesn't stretch back all of Disney's 94 years, it does confirm that since 1992 at least, Disney's long-term valuation has averaged about 21.5 times forward earnings -- about 37% higher than where Disney stock trades today.

Granted, there have been periods in which Disney stock bounced along much lower lows than where it sits today -- in 2007 and 2008 for example, where Disney stock fell below nine times forward earnings, and again in 2011, when the stock approached 10 times forward earnings.

By and large, though, I think Wells Fargo has it right when it says that, given the long-term trends, the chances of Disney stock bouncing back from today's prices are in fact "heavily skewed to the upside."

10 stocks we like better than Walt Disney

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Walt Disney wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of September 5, 2017

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

DIS

Other Topics

Stocks

Latest Personal Finance Videos

    #TradeTalks: A Holistic Financial Picture to Give a True Indicator of your Financial Health

    Harvest Founder Nami Baral joins Jill Malandrino on Nasdaq #TradeTalks to discuss the Harvest PRO Index, holistic financial picture to give a true indicator of your financial health, not just a credit score.

    Oct 9, 2020

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More