Has Disney Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Disney (NYSE: DIS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Disney.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

3.6%

Fail

 

1-year revenue growth > 12%

3.4%

Fail

Margins

Gross margin > 35%

21.2%

Fail

 

Net margin > 15%

13.4%

Fail

Balance sheet

Debt to equity < 50%

34.8%

Pass

 

Current ratio > 1.3

1.07

Fail

Opportunities

Return on equity > 15%

15.2%

Pass

Valuation

Normalized P/E < 20

18.05

Pass

Dividends

Current yield > 2%

1.4%

Fail

 

5-year dividend growth > 10%

16.5%

Pass

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Disney last year, the company has picked up a point for the second year in a row. Return on equity has climbed, and the stock has done even better, rising more than 30% over the past year.

Disney had a strong year in 2012, with success coming from across its spectrum of media properties. With the company opening a new theme park in Shanghai in 2015 and with ESPN signing new long-term agreements to show major league baseball and college football, the company was able to overcome a slow start to the movie season to shine.

Unquestionably, though, the news of the year came from Disney's $4 billion takeover of Star Wars giant Lucasfilm. With Disney already having successfully transformed Pixar and Marvel into amazingly strong film franchise producers that come tailor-made for marketing and merchandise opportunities, Lucasfilm will only add another set of coveted properties to its valuable content mix.

Longer term, a new content deal with Netflix (NASDAQ: NFLX  ) gives the streaming-video company rights to show much of Disney's content in the coming years. Moreover, a separate deal with DreamWorks Animation (NASDAQ: DWA  ) will take effect this year, maximizing Disney's outlet options while still keeping enough scarcity value to command premium prices.

For Disney to improve, it merely needs to take its new acquisitions and do what it has always done: find ways to maximize revenue from multiple income sources. If it can do that, then steadily rising dividends and improving margins should naturally bring Disney's stock closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Look for long-term winners by following Motley Fool co-founder David Gardner, whose picks have frequently trounced the market thanks to their revolutionary business models and disruptive potential. Act now and you can receive a personal tour of David's Supernova service, but don't wait because this offer ends soon. Click here to get instant access right now.

Click here to add Disney to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2209340, ~/Articles/ArticleHandler.aspx, 12/28/2014 3:09:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement