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Overextended Losses Create Buying Opportunity For Walt Disney Co (DIS) Investors

The market has been down on Walt Disney Co (NYSE:DIS) since its most recent earnings report on August 4. In the August 4 third quarter earnings report the company missed analysts’ revenue expectations by $130 million. Superior revenue growth is one of Disney’s greatest strengths and the slight miss for the quarter has sent the stock price down approximately 17%.

The revenue miss was a catalyst for the stock price’s descent; however, the stock price drop has also been influenced by a few other factors. First the revenue miss. A revenue miss for Disney will always cause investors to question the firm’s value because of the high P/E multiple it commands in comparison to its closest competitors, namely Twenty-First Century Fox Inc (NASDAQ:FOXA) and CBS Corporation (NYSE:CBS). Additionally, the market has been extremely volatile since the August 4 earnings report, due to high levels of uncertainty around the entire U.S. market as the Federal Reserve is on the brink of increasing the federal funds rate and pushing interest rates higher for the first time in nine years. The stock price’s descent has created a buying opportunity for investors in the current environment given Disney’s superior revenue generation capabilities overall.

Biggest Film Studios in the World

Insider Monkey points out that hedge funds’ long picks can generate alpha, and the top holders of DIS among hedge funds largely held on to their positions. Although there was some jockeying, the aggregate investment by hedge funds in DIS increased despite the drop in the number of funds holding DIS shares. Fisher Asset Management upped its position slightly by 1% to 8.45 million shares, while Lansdowne Partners slightly trimmed its stake by 1% to 8.32 million shares. Diamond Hill reduced its position by 7% to 2.4 million shares, and Adage Capital did the same by 16% to 1.98 million shares. These reductions, however, aren’t a cause for concern as these funds trimmed their positions before Disney’s latest earnings release. With the drop in the stock price, these same funds may show they have increased their positions when their filings dated at the end of September are released. Both Diamond Hill and Adage are more in the value mold, looking for bargains, so if the next filings show that they have increased their investments in DIS, it shouldn’t be much of a surprise.

When you look at Walt Disney Co (NYSE:DIS) in comparison to its peers, you see why its stock is vulnerable to the ebb and flow of its revenue production cycles. In comparison to its closest competitors, it trades fairly modestly in terms of P/B. Its TTM P/B is 3.74 versus a TTM P/B of 3.46 for CBS Corporation (NYSE:CBS) and 3.09 for Twenty-First Century Fox Inc (NASDAQ:FOXA). However, it demands a slightly higher P/E multiple given its larger market cap and superior revenue generating ability. When the company is posting strong revenue, its higher P/E is justified. In the current market, its forward P/E is currently 18.42 versus a forward P/E of 13.55 for Twenty-First Century Fox Inc (NASDAQ:FOXA) and 10.2 for CBS Corporation (NYSE:CBS). It also has a slightly higher dividend yield which also justifies its slightly higher P/E. Its dividend yield is 1.76% versus a dividend yield of 1.13% for Fox and 1.39% for CBS. In terms of market cap, the slightly higher P/E is warranted as it trades fairly evenly with its large-cap stock peers. The Dow Jones Industrial Average has a forward P/E of 15.1.

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