This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

The Earnings Power of the Magic Kingdom

Stock quotes in this article: DIS, NWSA, TWX

NEW YORK ( TheStreet) -- When I was a younger dad there was a fairly common gift-giving tradition that thrilled the recipients and the benefactor.

If you wished upon a star that your child or grandchild would have a successful and financial secure future, you'd buy them at least one share of Walt Disney (DIS) and take delivery of the colorful stock certificate. The certificate would be placed in a sturdy, glass-covered frame and hung on the child's bedroom wall.

Many of those stock certificates still exist, and their value has skyrocketed over the decades. As the owner of theme parks deemed "the happiest places on earth" and a media empire that includes the ABC network and ESPN cable network, DIS knows how to generate lots of green, crisp money.

If you've been waiting to buy some shares or add to your existing Disney shares, this may be a good time. Thursday, the company reported its latest quarterly earnings. Although quite positive considering the times, the company missed revenue forecasts and the stock dipped $1 after-hours.

Disney's net income in the latest quarter rose 14%, partially due to an increase in revenue. That increase was created mainly by higher consumer spending at its theme parks and on its cruise ships. Yes, they even own a popular cruise line aimed at families with children and grown-up "children," too.

Net income rose to $1.24 billion, or 68 cents per share, from $1.09 billion, or 58 cents per share, a year ago. The adjusted earnings of 68 cents per share matched the expectations of analysts.

When it comes to revenue, although it was 3% higher at $10.78 billion, it was slightly below the $10.9 billion analysts had expected. Movie studio revenue fell and revenue at the company's pay TV and broadcast networks grew a modest 2%. DIS has had better quarters, but overall this one wasn't too bad.

Disney's shares hit an all-time high back on May 15, 2012 at $45.80, and since that time it kept hitting new highs. On Sept. 25 it hit both a 52-week high and another all-time high of $53.40. The chart below helps us to see how the stock price has grown along with its operating margin and increasing revenue. DIS Chart DIS data by YCharts

As you can see, the quarterly revenue growth rate has subsided and so the stock is pulling back. The 200-day simple moving average of the stock price is slightly above $46, and there aren't enough reasons to believe the stock will correct that much.



Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust -- enjoy advance notice of every trade, full access to the portfolio and deep coverage of the latest economic events and market movements.

As I wrote in an article Thursday, "Now that the U.S. elections are behind us, the groundwork is being laid for some outstanding investment opportunities. As I write this the U.S. stock market is in freefall. Some hints of panic are in the air...A plethora of profitable companies and their stocks are offering some long-awaited 'bargain' pricing."

One of those "bargain" stocks is the reigning monarch of entertainment and nostalgia that spans more than 3 generations. With trailing 12 months (TTM) operating cash flow of more than $8.5 billion and levered free cash flow (TTM) of over $3.5 billion, we are seeing the tip of the iceberg when it comes to earnings and revenue growth over the next quarter and well into 2013.

This should not only help DIS sustain its current dividend of 60 cents per year, which represents a pay-out ratio of only around 20% of its earnings, but opens the way for dividend increases. CEO Bob Iger has mentioned he wants to see the company decrease its capital expenditures, perhaps hinting that paying shareholders a more generous yield on their investment is in the offing.

There's plenty of competition for Disney's empire especially when it comes to television and revenue from broadcasting sporting events. The forward (one-year) PE ratio is approaching 15. When compared to competitors like News Corp (NWSA), with a forward PE slightly above 12, and Time Warner (TWX), with a forward PE also around 12, DIS may be overdue for a share price pullback.

TWX, by the way, reported its earnings on Wednesday and they beat analysts' expectations on both earnings per share and revenue. TWX's $1.04 annual dividend produces a yield-to-price of almost twice that of Disney's current dividend (2.36% versus 1.2% for DIS).

So as one of my mentors used to tell his clients, "get ready, get set, not yet." That may apply to when DIS will be oversold and ready for value-conscious investors. If you look at Disney's relative strength index it appears that DIS is approaching an oversold level.

The very popular relative strength indicator is a momentum oscillator that compares the strength of gains against the strength of losses over a given period. RSI always ranges between 0 and 100. Values below 30 and above 70 are typically taken as oversold and overbought respectively.

A strengthening RSI indicates that gains are tending to dominate losses. Once the RSI climbs above 70, however, the sustainability of the gains becomes more questionable. Right now DIS is drifting towards an RSI level that in the past preceded a rebound to significantly higher levels.

As we watch the unfolding of this current stock market correction, we might recall that the fourth quarter of a year that includes a presidential election normally outperforms other quarters of the year. It won't be long until the stock market experiences an end-of-year rally. DIS should be a rewarding participant.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.



Jim Cramer's protege, Dave Peltier, finds you Stocks Under $10 picks with explosive upside potential. See what he's trading today with a 14-day FREE pass.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,822.98 -219.92 -1.29%
S&P 500 1,952.53 -19.76 -1.00%
NASDAQ 4,433.5640 -59.8260 -1.33%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs