Given the S&P 500's 16% gain over the past 12 months and its 50% rise over the last three years, it's fair to say stocks have performed very well recently. While such a strong run-up is nice for investors' portfolio values, it makes finding good stocks at reasonable prices a more difficult task.
But one market leader with strong fundamentals surprisingly continues to trade at a very conservative valuation. That company is none other than Walt Disney (DIS -1.70%) -- parent company of ESPN; Disney theme parks; and a thriving studio business that includes movies from Marvel, Lucasfilm, Pixar, and Disney. In a market like this, Disney offers investors a way to buy a quality company while allocating money to one of the few strong market leaders left with a conservative valuation.
Disney's recently reported third-quarter results drive home why Disney stock is such a steal at just 14 times earnings. The company's fundamentals relative to its conservative valuation make the media giant appear undervalued.
In Disney's most recent quarter, for instance, earnings per share jumped 29%, or 18% when excluding items that affect year-over-year comparisons. And Q3 wasn't an anomaly. The company's adjusted EPS rose 21% year over year on a trailing-nine-month basis. Further highlighting Disney's momentum, revenue is up 7% year over year for both the company's third quarter and the trailing-nine-month period.
Then there's Disney's strong growth in free cash flow, or the cold hard cash left over after capital expenditures have been subtracted from cash provided by operations.
Disney's parks and resorts and its studio entertainment segments have recently been notable standouts for the House of Mouse. Trailing-nine-month parks and resorts revenue and operating income are up 11% and 20% year over year, respectively. Studio entertainment revenue and operating income increased 13% and 12%, respectively, during the same time frame.
But not every segment is firing on all cylinders. Disney's media networks, which contribute about 45% of the company's total operating income, saw operating income decline 6% year over year in the trailing nine months. This segment, which is primarily driven by ESPN, has struggled to keep up with an evolving media landscape.
ESPN: A risk or an opportunity?
Though Disney's conservative valuation has arguably already priced in the headwinds in the company's media networks business, sustained declines at this rate in the important segment's operating income make this segment a key risk to owning Disney stock.
But this challenge can also be viewed as an opportunity. As Walt Disney continues to expand its internet-based ESPN+ service to capitalize on changing technology, ESPN's powerful brand could thrive as it becomes less dependent on legacy cable networks.
Indeed, investors already have promising data on Disney's early efforts to make ESPN more internet-friendly. The company's new ESPN+ service has seen strong conversion rates from free trials to paid subscriptions. In addition, subscription growth is exceeding management's expectations. CEO Bob Iger said in the company's third-quarter earnings call that the service "will become even more compelling to fans across the sports spectrum as we continue to expand the content and enhance the user experience."
Disney's strong overall fundamentals alone make a good case for owning Disney stock. But if management can turn around ESPN, the stock could handily outperform the market over the long haul.