It's Not Just the New York Giants that are Going to Disney World
The stock market has benefited from the impressive earnings release for their first quarter 2008 from The Walt Disney Company (DIS). Disney’s earnings news counters more recessionary data that lead to an ugly sell-off yesterday, which was sparked by an unexpectedly large plunge in service sector growth as reported by ISM Group. DIS earned 9.1% more revenue than last year, which has carried the stock into positive territory today. This is impressive considering that strong sales growth in late 2006 made for a tough year-over-year comparison and accounted for a 27% decline in Disney’s reported net income.
Conventional wisdom had maintained that sluggish consumer spending would threaten Disney’s theme parks division greatly. But in reality, theme park attendance was resilient and actually increase 3% over first quarter a year ago. Revenue for the theme parks was up 11%, with much of that growth coming from the flagship park, Walt Disney World in Orlando, Florida. Furthermore, Disney was not hit as hard as expected by the now 3-month-old-writer strike. Ad sales remained strong and revenue for the media division, including ABC television, was up more than 10%.
Disney continues to relate well to the younger generation and has benefited from two hugely successful franchises, Hannah Montana and High School Musical. Both of these multimedia vehicles sell extremely well and propelled the consumer products division to revenue growth of 29%. While the trendy kids shows of today are not guaranteed to be “in” tomorrow, Disney will surely benefit from their popularity as long as they can.
Disney shares are up more than 5% at the time of this posting and they were a catalyst for the short-lived stock market advance this morning. Ockham has rated this stock a “Buy” since mid-November and it is just now reaching our rationally expected low, given current levels of earnings, cash, and sales. Given those current valuation measures we expect it to trade between $32 and $48. While DIS is still undervalued by our valuation methodology, it is by no means the most undervalued stock in our coverage universe. We will continue to monitor the stock closely, but we hesitate to advocate buying it aggressively after today’s run up.
