Is Disney the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Disney (NYSE: DIS  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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% 3.9% fail
  1-Year Revenue Growth > 12% 5.3% fail
Margins Gross Margin > 35% 17.7% fail
  Net Margin > 15% 10.4% fail
Balance Sheet Debt to Equity < 50% 33.9% pass
  Current Ratio > 1.3 1.11 fail
Opportunities Return on Equity > 15% 11.1% fail
Valuation Normalized P/E < 20 17.23 pass
Dividends Current Yield > 2% 0.9% fail
  5-Year Dividend Growth > 10% 8.2% fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Disney only manages a score of 2, leaving it far short of perfection. But the company has continued following its acquisition strategy to bolster its business, fend off competitors, and stay current as content moves from old-fashioned theaters to Internet streaming.

Historically, Disney has made several great buys. Both Pixar and Marvel added depth to the company's flagship film offerings, and both are still paying off for the company. The latest installment of Pixar's Toy Story franchise brought in more than $100 million in its first weekend, and Marvel's Iron Man continued its winning ways in its sequel earlier this year. Competition will be fierce, with Time Warner (NYSE: TWX  ) looking to ramp up film production based on rival DC comic characters, but for now, Disney is the first mover.

Meanwhile, Disney has made moves to stay current on the content distribution front. In theaters, it has drawn from the increasing popularity of IMAX (Nasdaq: IMAX  ) locations. It expanded its deal with Netflix (Nasdaq: NFLX  ) to offer shows from its ABC Network as well as the Disney Channel.

As promising as all that sounds, the challenge is making great business practices fall through to the bottom line. Disney shares have a reasonable but not amazingly cheap valuation and carry only a token dividend. Despite the company's familiar name, investors can't count on perfection from Disney anytime soon.

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.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Walt Disney is a Motley Fool Inside Value pick. IMAX is a Motley Fool Rule Breakers choice. Walt Disney and Netflix are Motley Fool Stock Advisor selections. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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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.

  • Report this Comment On December 29, 2010, at 3:33 PM, esxokm wrote:

    I'm not certain we can say that the Marvel/Pixar acquisitions were smart moves, or that they added anything of value. At the end of the day, CEOs engage strategies to move their company's stock, and investors buy stocks to eventually sell them at higher prices.

    Pixar has been around for a while and has done nothing for either the stock or the dividend. Marvel hasn't been around as long, but I fear it will be the same thing for the next five years. Who knows, though, I can't predict the future.

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