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The Avengers Can Save the World but Can’t Move Disney Stock.

Tuesday, May 15th, 2018

The Disney Film Studios have done a fantastic job so far this year, they have grossed $1.2 billion which is 31% of the entire US box office. That is nearly a 50% increase from last year’s 22% share of the US box office. The Avengers: Infinity War, earned $258 million at the box office. But, before you run out and buy the stock it would be wise to look at the numbers.

I have owned Disney before and for the past year, maybe even two years, I would’ve liked to buy it back, but it just can’t seem to come into my value range. The 52-week range for the stock has been a high of $113.19 and a low of $96.20 with a current price just about $103 a share.

The problem I’m having is the valuation ratios, like many stocks today they are just too high. The current PE stands at 16 which is well above the industry average of 10.4. Price to sales is also expensive at 2.7, well above the industry 2.0. Disney carries a lot of intangible assets because of the value of their characters and acquisitions from names such as Marvel Comics and Star Wars. The company generates some nice cash flow which was $6.8 billion over the last six months but investors are still paying up for this cash flow at 11.6 which is above the industry at 8.3.

I think the company could be a little more generous on their dividend payout ratio which is 25.2%, a yield on the current stock price of 1.64%.

Last week the company released its quarterly earnings, the first for 2018. They did very well earning $1.95 for the quarter, well above the estimate of $1.70. Year over year the company has grown its sales by 2.5% which is under the broadcasting and cable industry of 6.3%. Earnings per share for the same period look far better, growing 11.6% compared to the industry decline of 15.5%.

Looking at the financial strength of the company. I was disappointed to see a current ratio of only 0.85, but that was the same as the industry so not as bad, but I would still like to see it at least at 1.00. Debt to equity favored Disney at only 54.7%, well below the industry average of 132.3%.

The equity for Disney has grown to $45.1 billion from $43.7 billion one year ago. The return on equity was very good for the company at 22.1%, not quite as good as the industry at 26.4%. If you ever wondered how much Disney makes off their movies or products I can’t give you an exact number, but I can tell you on average, for every dollar they bring in, they keep 18.1 cents for a profit margin of 18.1% which is just under the industry average of 19.1%.

The company over the last 12 months has turned over their receivables six times, not as good as the industry at eight times. The inventory turnover for Disney is far better than the industry at 24 verses 15.4 times.

Disney keeps its books on a fiscal year ending September verses a calendar year ending in December. Looking out to September 2019 the EPS is estimated to be $7.50 which would mean a target sell price of $123.75, yielding only a potential gain of 20%. Also, disappointing when compared to the September 2018 EPS of $8.03 a .53 drop. What could be happening here is that Disney is going to be investing more money back into their business perhaps a lot into the streaming side to compete with Netflix. What is pulling Disney down now is the TV side of their business and they know that streaming is the way to go in the future. With Disney’s muscle and high cash flow I think Netflix could have a fight on their hands. I think this will mean more options for consumers and better pricing as companies compete for market share. Who will be the losers? I think the shareholders of both Disney and Netflix. I don’t like to get in the middle of any fight, so I will stay away from both of these companies and maybe check back in a year or two hoping for the end of the fight and maybe a good investment value.

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