Disney Stock: Next Stop, $130?

By Rick Munarriz Markets Fool.com

Image source: Disney.

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Shares ofDisney(NYSE: DIS)are finally comfortably in the triple digits, having closed north of $100 for 35 consecutive trading days. At least one Wall Street pro thinks that this is just the beginning.

Piper Jaffray analyst Stan Meyers is bumping his price target on Disney stock from $115 to $130 this morning. He's naturally sticking to his overweight rating on the media giant. Meyers is encouraged by several factors, including the potential for corporate tax reform, Disney's promising pipeline of new movies, and the value-enhancing power of its acquisitions.

The prospects aren't rosy everywhere. Meyers' reassessment of all of Disney's major businesses finds him lowering his estimates for Disney's meandering cable networks. Life hasn't been easy for ESPN, Disney Channel, and its other networks in an era of cost-cutting millennials and the lure of cheap streaming services. However, that setback has been more than offset in the analyst's eyes by his outlook for Disney's theme parks, upcoming movies, and the impact that those films will have on the company's consumer products merchandising opportunities. He is boosting his average annual growth rate expectations by 100 basis points -- or 1%.

The long road back

Disney stock peaked two summers ago, just above $122. That was just before the weakening trend at ESPN became a battle cry for worrywarts. The stock took a hit, eventually crashing through the $100 floor.

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Rallies haven't been sustainable. When this 35-session streak of closing above $100 started, it was coming off nearly five months of closing in the double digits. I proposed that Disney wouldn't close below $100 againat the time, a bold prediction that has held up so far, but this is a stock that has been treating the $100 mark as if it's a chin-up bar in recent years.

The current streak began as the seventh time in 2016 that Disney stock had poked its head into the triple digits after closing below $100. I offered up three reasons for the gains to stick.

  • Disney shares were cheaper than they had been in the past at that point, given the media behemoth's improving valuations as revenue and earnings have risen 6% and 12%, respectively, over the past year. Disney at 18 times this fiscal year's projected earnings and 16 times next year's target may not seem like a bargain, but it's certainly reasonable given its pedigree. The multiple was 25 at its peak two summers ago.
  • Disney keeps returning more money to its shareholders. It has boosted its dividend rate every year since 2004, including its latest hike two months ago. Disney's yield now stands at 1.45%.
  • The future -- as Meyers is pointing out again this morning -- is rosier than the market thinks. Even the ESPN division, which some bears now argue is an albatross, is positioned to thrive, with Disney hopping on several digital delivery platforms to make sure the network remains relevant. Escalating programming costs are a concern, but it's a safe bet that live sports leagues won't have a lot of leverage when renewals come up.

Meyers' price target of $130 is certainly ambitious. It would suggest the stock doing what it hasn't done since the summer of 2015 in hitting new all-time highs later this year. However, even at $130, the stock would be valued at just below 20 times next fiscal year's earnings estimates. Between the long overdue expansion at some of its less popular theme parks and its ability to keep milking the Marvel, Lucasfilm, and Pixar catalogs for blockbuster content, the future's bright for Disney.

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Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.