Has Walt Disney Co. Lost Its Magic?

By Markets Fool.com


Source: Disneyland, Facebook.

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What: Shares of the magic kingdom, Walt Disney , rose $0.93 to close at $107.37 on Monday despite receiving a downgrade from Wall Street firm BTIG Research. Disney's closing price was an all-time high.

So what: BTIG analyst Rich Greenfield downgraded the stock to neutral from buy, saying Disney's share price has hit what he and his firm believe to be a fair valuation. Per Greenfield, Disney will have to execute almost to perfection to simply justify its current stock price, even with a couple of headwinds upcoming. For Disney, this means continued growth in its theme parks, ongoing movie box-office success, and substantial consumer products growth tied to its films.

Greenfield, who had maintained a buy rating on Disney shares for nearly five years, anticipates that cable cancellations (likely due to consumers' ability to stream live TV or shows via the Internet), along with viewers' unwillingness to watch television commercials, could slow Disney's broadcasting growth prospects. Although the analyst said he believes Disney is clearly best positioned among its broadcasting peers, he simply doesn't believe the company can execute its strategy without flaws.


Source: Frozen via Disney, Facebook.

Now what: Investors should be asking here whether Mickey Mouse can summon up some of his Fantasia magic and send Disney stock higher, or whether the House of Mouse has actually headed into Tomorrowland a bit too soon.

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A case could clearly be made for both the bulls and bears.

For the optimists, it's easy to believe Disney's momentum will be hard to slow. Disney's ESPN networks continue to collect strong ratings, Frozen has been an absolute monster, and its theme parks and resorts in its fiscal first quarter produced a 9% increase in year-over-year revenue and a 20% surge in income. Not to mention that sales of products spurred by Frozen helped boost profit in its consumer products segment by a whopping 46% year over year. Multiple years of strong results isn't luck for Disney -- it's a trend.

On the flip side, Disney's valuation is starting to get a bit goofy, and it leaves little room for disappointment. Disney's forward P/E of roughly 20 and its price-to-book ratio of four are both higher than its five-year average P/E of 18 and its price-to-book of 2.3. Furthermore, its 1.1% yield isn't exactly eye-catching. If Disney does have a bad quarter, that yield isn't going to provide much of a downside buffer.

Ultimately I tend to side with Greenfield that Disney appears due for a pullback, or at least a cooling-off period, in the interim or intermediate term. Disney certainly has pricing power and unparalleled branding ability, so it should outperform the market over the long term. Over the course of the next three years, however, it could be difficult for Disney to duplicate the success of Frozen or to squeeze out substantially higher profits from its broadcasting networks. Only time will tell if that's the case, but I don't see any reason to rush into Disney shares here.

The article Has Walt Disney Co. Lost Its Magic? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.