Is Disney A Buy After Earnings?

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Earnings Summary

Disney reported 2nd quarter numbers on May 8th.  The company reported earnings of $1.50, up 15% from the $1.30 earned in 2016.  So is Disney a buy after earnings?

For the first half of the fiscal year, earnings of $3.05 were reported versus the $3.04 earned in the first half of 2016.  This represents virtually no growth seen in earnings.  Excluding certain items, earnings were up 2% for the six months.

disney q2 2017 earnings

CEO Bob Iger commented on the strength of the studio and parks divisions.  He iterated focusing on long term shareholder value.  Even the much maligned media networks segment grew revenue 3% year over year.  That is the largest revenue segment with nearly $6B in revenue for the quarter though operating income dropped 3%.

ESPN has been the cause of the stock woes over the past 18 months.  The decrease in operating income was due to a decrease of revenues at ESPN which was partially offset by increases at the Disney Channels and Freeform.

ESPN saw higher programming costs which was partially offset by affiliate and advertising revenue growth.  I think the ESPN situation is overblown, the company is moving that content to many of the streaming services.  These headwinds will blow over, in the meantime I want to see if the share price pulls back to an unreasonable level.

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FAST Graphs

disney fast graph 5/14/2017

Looking at the FAST Graph for Disney, a few trends are highlighted.  The blue line represents the average PE ratio the market has historically paid for Disney shares.  For the time period selected that value is approximately 17.  Shares today are trading above that, at nearly 19x earnings.  Over time, Disney has consistently been able to grow earnings which is one trend I like to see in my holdings.  The company has arguably spent most of the past four years in overvalued territory.  Overvalued territory would be when the stock price is above the blue line.

When shares dipped at broke into the $80s near the end of 2016 I personally bought a lot then.  Shares have since rocketed back around the $110 range.  This highlights about buying when the market is quite sour on a quality company.

Simply Safe Dividends

disney simply safe dividends 5/14/2017

From Simply Safe Dividends, Disney scores in the 95th percentile of dividend safety.  Safety to me is of utmost importance when analyzing a company.  If a company doesn’t pass this test, I won’t consider it for my portfolio.

The company also ranks higher than 87% of other companies in how fast the dividend is being grown.  I’ll cover more about the dividend in the next image.  Finally, the current yield is low, this is where the company may not be too interesting for investors looking for current yield.

The current yield of 1.4% is lower than the overall S&P level, but Disney is one of my holdings I view as a long term income producer and subsequently market beater.

disney simply safe dividend growth rate

When it comes to the current dividend, the company is only paying out 1/3 of it’s free cash flow to dividends.  I look at the free cash flow payout ratio over earnings since a dividend is an actual cash payment from the company.

Very roughly speaking, the company could double it’s dividend today and still be quite healthy financially speaking.  This is where I’m excited, over the next decade or so I expect them to slowly trend towards a higher payout ratio.  This will be accomplished by giving investors a high growth rate.

Over the past 5 years, Disney has compounded their dividend growth rate by an average of 20%.  2016’s increase was “only” 8.8% and I expect that high single digit growth rate to continue for many years.  As dividend yields don’t grow to the sky, expect shares to rise by a comparable rate.

Custom Stock Alerts

disney custom stock alerts 5/14/2017

In the image above I’m showing my alerts I have setup for Disney with Custom Stock Alerts.  I do have an alert for all of the alert types though some of them I would only use for informational purposes.  I’m not planning on selling my shares anytime soon but I would be interested in knowing when shares are near a 52 week high or hit $125 for example.

My primary use for Custom Stock Alerts is finding an optimal time for starting or adding to a position.  For Disney specifically, here’s what I’m looking for:

  • Shares near a 52 week low or
  • A PE ratio below 17 (historical average from FAST Graphs)
  • A share price dropping below $100

Summary

Disney is an absolute machine as I saw first hand in April when visiting the parks.  I loved the efficient use of technology throughout all of the parks, the MagicBand is a great tool to facilitate every part of your visit.  I also loved using FastPass on my phone to keep any ride wait times to a minimum.

Disney is a holding I view as a core, never sell sort of holding (view my full portfolio here).  With that said, I want to see shares pullback some to a historical multiple.  For 2017, a share price around $100 would be about my price point for adding.  I’ll reinvest my dividends in the meantime.

The company is still projecting about 4% EPS growth for the full year though they are nearly flat through the first six months.  Unfortunately at this time, the stock is a hold in my eyes and I’ll wait for one of my alerts to trigger before considering adding more.

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