Shares of Walt Disney (DIS 0.16%) ticked higher on Tuesday, rising about 1.7% even as the S&P 500 index fell 0.6%. Bullishness toward the entertainment giant comes as two analysts raised their price targets for the stock, betting shares can finally break through the $90-$120 range they have mostly been trading in since 2015.
The two analysts believe investors may soon show more appreciation for the company's valuable intangible assets and its growth potential as management executes on its long-term plan to morph its business into a direct-to-consumer model.
With shares trading conservatively relative to Disney's underlying fundamentals, these analysts seem to be onto something.
Walt Disney's ESPN-branded streaming app. Image source: Walt Disney.
Time to break out
Optimism from two analysts comes ahead of Disney's 2019 Investor Day on Thursday. During the event, the company is planning to provide investors with the first glimpse of its long-awaited direct-to-consumer streaming service, Disney+. The event could "provide a needed number reset (for near-term Fox deal dilution and [direct-to-consumer] costs)," wrote Cowen analyst Doug Creutz in a note on Tuesday morning. "Investor focus can shift to this positive catalyst path, and dreams of Netflix-like valuations for the DTC business in years to come."
Michael Nathanson of independent research boutique MoffettNathanson similarly wrote on Tuesday that "investors can focus on the potential asset value that Disney will create launching Disney+ and controlling Hulu."
Creutz raised his 12-month price target for the stock to $131, up from $102. He also upgraded his rating on the stock from market perform to outperform. Nathanson reiterated his buy rating for the stock and increased his 12-month price target to $134, up from $132. Both price targets would represent new highs for the stock, which has struggled to push through $120.
A compelling valuation
Disney stock does, indeed, look attractive today.
Fundamentals are strong. The company's revenue and operating income rose 8% and 6% year over year in fiscal 2018, respectively. This business growth was helped by 10% and 19% year-over-year increases in parks and resorts and studio entertainment revenue, respectively. While Disney's largest segment in fiscal 2018 (Disney has since reorganized its segment reporting), media networks, grew at a slower rate of 4% year over year, parks, resorts, and studio entertainment together accounted for nearly half of Disney's total revenue.
Looking ahead, these two segments, now called "parks, experience and consumer products" and "studio entertainment," have some powerful catalysts on the horizon. Star Wars-themed parks are set to open at Disneyland this summer and Disney World later this year, and a sequel to Frozen, a Lion King remake, Star Wars: Episode IX, and more are coming to theaters in 2019.
Finally, Disney's new "direct-to-consumer and international" segment represents an opportunity as well as the company continues to grow ESPN+ and brings Disney+ to market later this year.
All this, yet Disney trades at just 16 times earnings.
While I'm not one to set a 12-month price target, I do believe there's likely good upside ahead for investors willing to hold for the long haul.
