3 Reasons Why It's the Wrong Time to Downgrade Disney Stock

By Rick Munarriz Markets Fool.com

Shares ofDisney (NYSE: DIS)hit another 52-week high on Monday, moving up despite an analyst downgrade earlier in the day. David Miller at Loop Capital is downgrading the stock -- taking his rating from buy to hold -- but it's not as if he feels that the fundamentals are starting to come undone. Miller's move is strictly a valuation call.

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Miller is sticking to his earlier $118 price target on the shares. Disney stock was trading in the double digits through most of last year, and with the stock rallying in recent months, the analyst simply feels that the stock has gotten ahead of itself.

It's a fair call in theory. The stock opened north of $115 on Monday, and at that point, a bullish analyst with a price target of $118 should either boost that goal or revisit the rating. However, let's go over a few of the reasons why it's wrong to downgrade the media giant at this time.

It's not just Dumbo flying high at Disney these days. Image source: Disney.

1. Disney is a better company than it was two years ago

Disney stock hit a new 52-week high at Monday's open, but it's not an all-time high. The shares hit an all-time high of $122.08 two summers ago, and while one can rightfully argue that the House of Mouse may have been gotten ahead of itself at that time, it's not as if Disney is less of a company now than it was two years ago.

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Disney's been the studio behind most of the biggest box office winners over the past two years. Despite the challenges -- ESPN's subscriber base that peaked in 2011 and theme park attendance declining in a few recent quarters -- revenue continues to grow across Disney's segments. We've seen revenue grow 13% since the end of fiscal 2014 with earnings per share soaring 30% in that time. It also shouldn't come as a surprise to find that Disney is a better company than it was when Miller initiated the $118 price target last year.

2. Earnings are right around the corner

Disney announces quarterly results in two weeks, and there's certainly an argument to be made about being bearish heading into the report. There's no end to the cord-cutting that's weighing on its cable networks. The domestic theme parks will be facing headwinds with the potent Easter holiday falling during the June quarter this year versus the March period a year earlier.

However, let's not forget about last month's Beauty and the Beast killing it at the local multiplex, triggering consumer products sales and theme park visits. Let's also remember that Disney is succeeding at making more from less, as it did during the holiday quarter when it turned a 5% year-over-year decline in guest counts at its stateside parks into an overall 6% increase in parks and resorts revenue and a 13% surge in the segment's operating profit.

Disney has proven mortal a couple of times in recent years, but this is a company that has more often than not blown Wall Street's profit targets away under CEO Bob Iger's tenure.

3. Disney's outlook should be bright

There may be challenges in sizing up Disney's fiscal second quarter, but its near-term outlook should be pretty encouraging. It has major theme park additions opening on both coasts next month, and the Easter headwind in the fiscal second quarter will be a tailwind in the third quarter. Disney has a few sequels from blockbuster franchises hitting the big screen in the coming weeks.

Any concerns that may come up should be more than offset by the catalysts swinging away at the on-deck circle. Things are getting better for Disney, making it hard to bet against the media monster.

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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.