Exciting developments have taken place at Disney (NYSE:DIS) over the last few months, including a big fat dividend increase of 25% and the acquisition of Lucasfilms for $4 billion. With the stock recently pulling back to below $50 per share, let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Dividends can be a great catalyst for a stock. Rising cash payments generate visibility about the company’s fundamental strength, and they also send a positive signal to investors regarding management’s expectations about the future of the business. Disney has an active policy of recurrently raising dividends, and the recently announced increase of 25% is a materially bullish factor for the stock.
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The entertainment company has been reporting solid performance over the last several quarters. The tremendous success of The Avengers shows Disney is as strong as ever when it comes to bringing new products to market. Moreover, the acquisition of Lucasfilms will generate fresh opportunities for growth over the coming years as Disney capitalizes on the popular Star Wars saga with new movies, park attractions, and all kinds of consumer products.
E = Equity to Debt Ratio is Healthy
Disney has a Debt to Equity ratio of 0.3, which is quite moderate. The entertainment industry is cyclical, but Disney has a solid trajectory of cash flow generation during all kind of economic scenarios.
T = Technicals on the Stock Chart Are Strong
Shares of Disney have been on a long term uptrend over the last year, making new all-time highs in the area of $53.4 at the end of September. The stock then pulled back and gapped down to the area of $46.5 after announcing the acquisition of Lucasfilms on November 9. Disney has been recovering since and is once again nearing $50 per share… (see my conclusion on the next page)
Pullbacks are a typical knee jerk reaction when acquisitions are announced. However, the stock remains in a long term rising trend. This temporary retracement may provide an opportunity to buy the shares at a convenient entry price.
A = A Level Management Runs the Company
Bob Iger has served as CEO since 2005. He is expected to remain in charge until at least 2016. Iger has been a dynamic and innovative leader, focusing on new technologies and high quality content. He was responsible for the acquisition of Pixar in 2006, which was a foundational step in the renovation and modernization of Disney over the last years. Disney is a well-run company, delivering solid results with attractive growth opportunities in the middle term.
With acquisitions like Pixar, ESPN, Marvell and more recently Lucasfilms, Disney has incorporated some very valuable assets and consolidated its strategic position as an undisputed leader in the entertainment industry on a global scale. Financial performance has been strong as reflected by the growing dividend, and the company is well positioned to continue monetizing its brand and intellectual property through different venues over the following years.
Trading at a P/E ratio of 15.8, shares of Disney are reasonably valued. The recent pullback in the stock may present a buying opportunity in a fundamentally strong company. Disney should OUTPERFORM in the long term.
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