After rising by almost 45% over the last year, Disney (NYSE:DIS) stock is trading near historical highs, in the neighborhood of $102 per share. This is great news for investors positioned in the stock, but has left some who missed the rally wondering if it's already too late to jump in? Make no mistake; this magic ride has barely begun.
A magic business
Disney is one of a kind in the entertainment industry. The company has built a strong emotional bond with global consumers from different generations over the years, which has given it an irreplaceable source of competitive differentiation. Brand recognition and an extraordinary portfolio of intellectual properties make Disney an undisputed heavyweight champion in the business.
Furthermore, Disney gets to benefit from its enormously valuable assets via multiple platforms at the same time, which allows the company to deliver extraordinary financial performance. For example, "Frozen" was an explosive success for the company in the fourth quarter of 2013, becoming the highest-grossing animated movie of all time. A full year after the original release, Disney is still benefiting from "Frozen" in a big way.
On March 13, along with "Cinderella," Disney will be premiering a new short, "Frozen Fever," bringing back the "Frozen" characters and voices and introducing a new song. The massive success of "Frozen" didn't simply set the stage for more movies from the same franchise; Disney is smartly leveraging "Frozen" to boost other titles.
Also, sales in the consumer products division jumped by an impressive 22% year over year during the last quarter, and "Frozen" merchandise was a major driver of that increase.
During the latest earnings conference call, Disney CEO Bob Iger explained:
Among media companies, Disney stands out. No one else comes close to our unparalleled collection of strong brands or our pipeline of great content. And our unprecedented ability to leverage creative success and creating value across the entire company allows us to adapt to emerging challenges, take advantage of new opportunities, and most importantly, innovate for the future.
The best is yet to come
Disney crushed Wall Street expectations during the last quarter, as both sales and earnings came in comfortably ahead of forecasts. Sales grew 9% year over year to $13.4 billion, while segment operating income increased 17% versus the same quarter in the prior year. Earnings per share jumped by an impressive 23% annually. Profit margins are on the rise over the last several years, and the company is reducing its share count via buybacks, so earnings are growing at quite an exceptional rate for a company as big as Disney.
Importantly, the magic pipeline is full of exciting content for 2015. "Tomorrowland," an original Disney adventure starring George Clooney, is scheduled for release in spring, and the highly anticipated Avengers sequel, "Avengers: Age of Ultron" opens in May. Also, the company has two Pixar movies on the way this year: "Inside Out" and "The Good Dinosaur."
The main course for 2015 will of course be "Star Wars: The Force Awakens," which is scheduled for release on Dec.18. Needless to say, this will be a major event with massive repercussions across the world, according to management; the teaser released last November has already been viewed more than 123 million times.
On price and quality
According to S&P Capital IQ, Disney trades at an adjusted forward P/E ratio near 22 times earnings forecasts for the fiscal year ending in September 2015. This is a premium versus the overall market, which resides in the neighborhood of 18 times for the average company in the S&P 500 Index. However, Disney is a superior company, and higher quality comes at a higher price. While the stock is not dirt-cheap, its valuation is not excessive, either.
Disney is a top-notch company to hold for the long term. Being patient and careful when a stock is making new highs is generally a smart idea, and it makes little sense to rush into Disney while the stock is as hot as it gets. However, don't miss the forest for the trees, as everything seems to be indicating that Disney will continue making record highs over years to come.