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It’s a Small World After All
Walt Disney, the founder of the giant entertainment company bearing his name had it right — it’s a small world after all.
That has certainly been the case as an economic slowdown in the U.S. cascaded into a global recession that still has its grip
on much of the world. The so-called “decoupling” has proven to be more of a myth than fact.Indeed, we are tied together deeper in ways Walt Disney could never imagined. Unfortunately, the benefits of such global interconnectedness
do not come without a price.The recession we are now experiencing has been long, deep and far-reaching. As a result, companies like Disney () have
floundered. What was once a business that delivered steady profits is now a company with significantly lower revenues. It’s never
easy for a large company to react to such a state and do so nimbly.In the case of Disney, it was like the Titanic hitting the iceberg. Management may have seen the slowdown coming, but there
was not much they could do to turn the ship in such short time.
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Buy When Things Are Bleak
The result: Shares of Disney collapsed.
From a peak of $35 per share a year ago, the stock crumbled to approximately $15 per share at the bottom in early March.
Now we are seeing the U.S. economy recovering and with it the hopes of a bottom in the market. Stocks rallied hard over the
last month. Shares of Disney participated in that rally, gaining more than $7 per share.This week Disney reported earnings of 43 cents per share for the recently completed quarter. Though results were hurt by the
global economic slowdown, the company easily beat expectations of 40 cents per share. Although attendance and spending are down,
a bottom may be at hand.Many say that the stock is due for a pullback, but I’m not interested in such shortsightedness.
Disney is one of the few really large businesses with promising growth prospects. With a stronger economy, I see shares recovering
in short order. Remember, the time to buy is when things are bleak.Here are my top 5 reasons to buy Disney now…
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Reason #1 to Buy Disney: Valuation
How do you value what a stock is really worth?
My preferred method is to rely on operating fundamentals. For example, the basic price-to-earnings ratio is a simple way to
know if a stock is cheap or expensive.In the case of Disney (), analysts expect the company to make $1.67 in the current
fiscal year ending September. At a price of $23, Disney trades for less than 14 times forecasted earnings. The expectation is
for the company to grow earnings by 14% from 2009 to 2010.With expectations low, it is likely that Disney will beat current expectations. With such a low valuation, there is plenty of
room for upside surprises that could push Disney shares higher.
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Reason #2 to Buy Disney: Blockbuster Bonanza
Only one word is needed here: Wolverine. The Marvel Comics production scored a huge bonanza at the box office this past weekend.
The recession has been very kind to Hollywood. Disney and its Pixar Studios will surely benefit from the strength in movie attendance.
While the rest of its business sees weakness, the movie side of Disney can be expected to pick up the strength.Expect the unexpected when it comes to Disney and movies. The animation division alone, especially in terms of Pixar, is a reason
to own this stock.
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Reason #3 to Buy Disney:
Best in BreedSo what if advertising and theme park revenue are down? Disney is king when it comes to entertainment — nobody else comes
close. As such, Disney stock deserves a premium valuation as compared to other entities operating in the same space.One of the few consistencies of the market is that leaders lead. It’s always a good strategy to own stocks of the best in any
portfolio. And Disney fits the bill perfectly.When economic strength returns to the global economy, look for Disney to really take off. For those wanting exposure to the
media and entertainment industry, there is no better choice than Disney.
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Reason #4 to Buy Disney: Consumer Weakness Dissipates
Slowly but surely, the consumer is waking up from his long slumber. The shock of the financial market collapse is wearing off
like a bad hangover.In the wake of the damage, those companies dependent on discretionary spending may be poised to emerge from hibernation stronger
than before. Though spending may have been weak during the recession, interest in Disney products has only grown. That pent-up
demand can be expected to drive double-digit earnings growth in the years that follow the end of the recession.Buying that double-digit growth at a cheap price when current attendance at theme parks is at a nadir, makes a ton of sense
to me.
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Reason #5 to Buy Disney:
Global GrowthThe best part of being a small world is that Disney can bring its brand of entertainment across the globe with relative ease.
The corporate mission of the company resonates with audiences of different nationalities. As such, the world is Disney’s oyster.China, in particular, may offer the biggest opportunities. It’s slow going in penetrating the former Communist country, but
over time, investors can expect less resistance. Tapping into those markets will bode well for Disney investors in the long term.
Potential global growth is a great reason to pick up shares of Disney.Companies that depend on the consumer have been decimated by the recession. Though painful, the time to buy stock in these businesses
is at the bottom. Though Disney () has recovered from the lows reached in early March,
there is still plenty of upside potential left. And an economic recovery will greatly enhance returns over the long term. I expect
shares to reach prior highs within the next year or two.Related Articles:
