Disney Stock Upgraded Twice in 2 Days

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

This week is turning out to be a good one to own stock in Walt Disney (NYSE: DIS), and tomorrow could be the best day of all -- or so think Wall Street analysts.

Already, this week has seen two different investment banks upgrade Disney stock ahead of Thursday's investor day, where the company will discuss the advent of the Disney+ streaming service. And while a recent report from Credit Suisse (via StreetInsider.com) notes that "Walt Disney has been the most heavily debated stock in our coverage this year," with a "remarkable range" of opinions on the company's prospects, for some analysts, a consensus seems to be forming:

Disney stock is a buy.

Upgrading Disney

This morning, BMO Capital announced it is upgrading Disney shares from market perform to outperform and assigning a $140 price target, implying nearly 20% upside to today's prices.

Disney plans to open two Star Wars lands in its theme parks this summer, explains BMO. At $20.3 billion in annual revenue, parks account for just over one-third of Disney's $59.4 billion in annual revenue, and earn the company an impressive 22.2% operating profit margin. Revenue from the new lands should therefore be good news for Disney's bottom line.

That may not even be the best news for Disney investors, though. The entertainment giant's media networks divisions -- both broadcasting and cable -- contribute even more to its business at better than 41% of annual revenue, and with margins topping 26.5%. BMO notes that Disney will be starting up its Disney+ over-the-top streaming service before the end of this year, which holds the potential to add even more revenue and profit.

Upgrading Disney, the prequel

BMO's comments echo similarly optimistic remarks from Cowen & Co. yesterday. Referring to Disney+, Cowen is predicting an "extremely strong launch" and even greater subscriber numbers than others on Wall Street expect.

Cowen places greater focus, however, on what is perhaps Disney's most famous business: film.

Disney's not-so-secret weapon

And for good reason: Disney's slate of films coming out this year (or already out) stands pretty close to mind-boggling.

Toy Story 4. Frozen 2. Captain Marvel. New installments from the Spider-Man, Avengers, and Star Wars franchises. And, of course, live-action reboots of both Aladdin and Dumbo. Cowen calls this a "very powerful pipeline of product," and it's hard to argue with that assessment.

In Cowen's estimation, Disney's film slate alone could yield as much as $3 billion in profit -- not revenue -- this year, topping last year's profits haul, which was itself a record for the company, according to data from S&P Global Market Intelligence. When combined with the potential for better-than-expected subscriber counts at Disney+, Cowen sees Disney's "catalyst path for the next year as highly attractive" -- and the stock as worth at least $131 a share.

Crunching the numbers

Is it, though? Is Disney worth the $131 per share that Cowen says, or even the $140 price target that BMO assigns it? Or is the stock worth somewhat less than that?

Here's how I look at the numbers:

Valued at $210 billion in market capitalization, Disney trades for 19 times its trailing earnings of $11 billion. Actual free cash flow at the company, however, is quite a bit less than reported net profit -- only $9.5 billion, in fact. And on top of all that, despite all the catalysts working in Disney's favor, most analysts are predicting its profits will decline this year, to $6.52 per share.

At a P/E ratio of 19, with long-term earnings growth projected at just over 9% and a 1.5% dividend yield, Disney still looks like a great company to me, and it's certainly a dominant business in entertainment -- but it's not yet a cheap stock. Before rushing out and buying shares in response to the analyst upgrades, or in anticipation of great news from tomorrow's investor day, consider: Are you willing to overpay to own a piece of Disney?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.