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Should You Buy Disney (DIS) Stock Ahead of Earnings?

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Shares of Disney (DIS - Free Report) surged to a new high Monday one day before the entertainment conglomerate is set to release its fiscal third quarter financial results. The climb could signal that investors expect good things from Disney, so let’s see if DIS stock looks worth buying ahead of its quarterly earnings release Tuesday.

Overview

Disney is set to purchase a huge chunk of Twenty-First Century Fox’s (FOXA - Free Report) business after Comcast (CMCSA - Free Report) dropped out of the race. Bob Iger’s firm hopes its acquisition, which includes Fox’s film and TV studio, will help it better compete in the age of Netflix (NFLX - Free Report) . The company’s proposed $71 billion purchase of key Fox assets will likely be rolled into Disney’s new stand-alone streaming service that is reportedly due out at some point in late 2019.

From price to content, not that much is known about Disney’s streaming service, but the company recently gave Ricky Strauss creative oversight of the service's programming. Disney’s jump into streaming comes at a time when both Netflix and Amazon (AMZN - Free Report) have committed to spend more on their own content, while Apple (AAPL - Free Report) also looks poised to join the battle next year. Meanwhile, the firm is committed to revamping the struggling ESPN, which includes its new ESPN+ streaming services.

Investors should note that Disney’s quarter will include revenue from Black Panther, Avengers: Infinity War, and Incredibles 2. These three films alone accounted for $1.8 billion domestically as of the end of June, according to data from Box Office Mojo.

Price Movement

Shares of Disney have climbed 260% over the last 10 years, which outpaces the S&P 500’s 127% climb. However, during the last five years, Disney stock is up just 75% compared to the S&P’s 72%. DIS stock has moved sideways over much of the last three years, lagging the index and its industry. Yet, shares of Disney just touched a new 52-week high of $116.38 per share Monday morning.

 

Valuation

Moving on, Disney stock is currently trading at 15.7X forward 12-month Zacks Consensus EPS estimates, which marks a discount compared to its industry’s 19.5X and the S&P’s 17.3X. Over the last year, Disney has traded as high as 17.8X and as low as 13.4X, with a one-year median of 15.2X.

Plus, DIS has traded as high as 22X over the last five years, with a five-year median of 17.4X. Therefore, Disney stock appears rather attractive at its current level.

 

Outlook

Our current Zacks Consensus Estimate is calling for the entertainment company’s quarterly revenues to climb by 8.8% to hit $15.49 billion. Disney’s top line is projected to pop by 7.5% to reach $59.26 billion for the full year.

At the other end of the income statement, Disney’s adjusted quarterly earnings are projected to surge by over 24.5% to reach $1.97 per share. The company’s fiscal 2018 earnings are expected to touch $7.04 per share, which would represent over a 23% expansion.

Earnings Trends

Disney has received three downward earnings estimate revisions for the third quarter over the last 30 days, with 100% agreement to the downside. Investors should note that our Q3 earnings estimate has also fallen by $0.08 over the last 30 days, signaling that analysts are less positive about DIS than they were a few months ago.

The firm also earned this same three to zero downward ratio during the same stretch for fiscal 2018. But, Disney has topped our quarterly earnings estimates in seven out of the last 10 periods.

Bottom Line

Disney stock is currently a Zacks Rank #4 (Sell) based mostly on its recent negative earnings revisions trends for Q3 and its current fiscal year. Therefore, investors might want to stay away from DIS stock until after the entertainment powerhouse reports its quarterly financial results after the close of regular trading on Tuesday.

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