Some investors prefer the excitement of owning growth stocks. These businesses generally exhibit rapid gains in revenue and earnings. And the hope is that the result can be huge portfolio returns.
Then there are investors on the other end of the spectrum who like value stocks. There are instances when businesses trade at compelling valuations. As fundamentals improve, the market should become optimistic, leading to strong returns.
There's one company I've identified that certainly falls into the latter group. A few years from now, you'll look back and probably wish you had bought this undervalued stock.
A cheap earnings multiple
The undervalued stock investors should consider right now is none other than Walt Disney (DIS -1.65%). This company is a global media and entertainment leader that has its hands in various areas, such as film production, linear cable networks, streaming entertainment, theme parks, hotels, cruise lines, and consumer products.
Shares of Disney have been wildly disappointing, to say the least. In the past five years, they have produced a total return of negative 26%, which means shareholders would have lost capital. On the other hand, investing in the S&P 500 would have more than doubled someone's money over that same time frame.
As a result, the stock is cheap right now. It trades at a forward price-to-earnings ratio of 18.6. In the past three years, the valuation has rarely been lower. In fact, the current multiple is 29% cheaper than the average since October 2021.
All else equal, investors should undoubtedly want to own stocks trading at lower valuations, as opposed to those selling at elevated multiples. That's because this introduces the possibility that the valuation ratio will expand as the market's sentiment shifts from pessimism to optimism.
In this case, the fact that Disney's segment operating income in fiscal 2023 is lower than the total from fiscal 2018 might be the key reason for the stock's poor performance. But as I'll touch on below, I believe there are better days ahead.
NYSE: DIS
Key Data Points
Bullish on the House of Mouse
An attractive valuation multiple on its own isn't enough reason to buy a stock. Investors must have the conviction that the underlying business is high quality, and that the shares are undervalued. With this mental framework, let's consider why Disney fits this description.
For starters, I believe this company has a durable competitive advantage that is almost impossible to replicate. Disney's intellectual property -- which comes from decades of creating characters, storylines, and franchises that resonate strongly in the minds of consumers -- is what makes up its economic moat. Consequently, I don't believe the company will be disrupted anytime soon. I'm confident that the business will still be relevant 50 years from now.
I also think that its bottom line is going to dramatically improve in the years ahead. Earnings have been under pressure in recent years due to heavy investments in the company's streaming operations, particularly in the creation and licensing of content.
However, Disney might have hit an inflection point. Its direct-to-consumer operations, which includes Disney+, Hulu, and ESPN+, reported positive operating income in the third quarter (ended June 29) for the first time. "We remain on track for the profitability of our combined streaming businesses to improve in Q4," the latest earnings report reads.
Management has embarked on notable cost cutting with a clear prioritization on attaining sustainable and rising profitability within the streaming segment.
And I have yet to mention the experiences segment, which houses Disney's theme parks, cruises, and merchandise sales. This division has seen its revenue and operating income increase at healthy rates historically. There is pricing power, huge barriers to entry, and still a sizable growth runway to benefit from, all wonderful qualities.
Taking all these positive factors into account, Disney's current valuation makes the stock look like a no-brainer buy. A few years from now, you'll probably regret not adding shares to your portfolio.
