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For Disney, better days could be coming

Even as shares of Walt Disney (DIS) have pulled back this year with the media and entertainment conglomerate struggling to cope with short-term headwinds, Wall Street remains upbeat on the company's prospects. Part of the reason: Analysts still see positive factors beyond Disney's current problems.

Disney's mixed second-quarter results spooked many investors, with revenue and earnings expectations falling below analysts' consensus forecasts. "Investors are pricing in several concerns, especially associated with the slowing subscriber growth at ESPN, but there were also several reasons for optimism," said Brian Wieser, analyst at Pivotal Research, who upgraded his recommendation on the stock to a "buy" from "hold" and raised his price target to $121 a share from $104.

It was the first time that Disney had failed to meet the Street's expectations in over two years, analysts noted. However, although Disney reported a "messy" second-quarter miss, said analyst Doug Mitchelson of UBS in a note to clients, "the company's core trends are still strong." He's staying with his "buy" rating on the stock, with a price target of $112 a share. (UBS has done business with Disney.)

Disney's stock has tumbled hard from its high of $122 just six months ago. It closed on Friday, May 13, at $100.57 a share.

Despite that wobbly performance so far this year, investors have had a great ride with Disney over the past five years. In 2011, Disney traded as low as $28 a share. That's when the stock started its long climb, hardly looking back. The upswing brought Disney to its high in late 2015, and now several analysts expect a new high this year. With a market capitalization of more than $180 billion, Disney is one of the sturdy components of the S&P 500-stock index.

To equity analyst Tuna Amobi of S&P Global Market Intelligence, the second-quarter results were "relatively encouraging," showing continued strength in studio entertainment, theme parks and, to some extent, the cable networks business. So he believes it's likely that the upward momentum will continue in 2016 despite a "relatively tempered outlook for growth in cable affiliate fees."

Amobi, who rates Disney a "buy" with a 12-month price target of $110 a share, said concerns about the exposure of 80 percent-owned Disney cable network ESPN "to potential adverse shifts in the U.S. pay-TV landscape seem overdone." The analyst expects continued growth in affiliate and advertising revenues, (including ESPN, ABC and Disney Channel), with strong attendance on guest spending at domestic theme parks.

Amobi also sees a "thriving consumers products business on a very robust film pipeline," thanks to the Marvel and Lucasfilm acquisitions, including the "Star Wars" franchise. So he forecasts consolidated revenues in fiscal 2016 (ending Sept. 30) likely growing by 7.7 percent and rising 4.6 percent in fiscal 2017.

Disney theme parks increase security

Against some currency headwinds, Amobi projects EBITDA margins of 31.6 percent in fiscal 2016 and 31.8 percent in fiscal 2017. That's because Disney should benefit, he said, from "solid film results, increased operating leverage at the domestic theme parks and an enhanced mix of higher-margin (including TV retransmission revenue, digital streaming, international TV syndication licensing royalties), partly offset by higher programming costs at the TV networks (including ESPN and ABC)."

The S&P analyst forecasts Disney earning $5.82 a share in fiscal 2016, up from last year's $4.90. And for fiscal 2017, Amobi projects earnings of $6.23. His price target of $110, based on enterprise value/EBITDA estimates, is 10.7 times his 2017 estimate -- a notable premium to peers and the 10-year average of 9.4 times. Added enticements to investors are Disney's ongoing share buybacks and a dividend yield of 1.4 percent.

Is Disney now a buying opportunity? Neil Macker, equity analyst at Morningstar, noted in a report to clients that with the stock's current price, Disney "may offer an attractive entry point for investors with a longer-term investment horizon." He's maintaining his "wide-moat" rating on the stock and his fair value estimate of $134 a share.

He noted that revenue growth of 4 percent from a year ago was led by audio entertainment, which rose 22 percent. And EBITDA increased 8 percent, to $4 billion, which is higher than his $3.7 billion estimate. The improvement in the parks and resorts segment was led by improved domestic performance and was slightly offset by increased pre-opening expenses for the Shanghai Disney Resort, scheduled to open in June.

Disney's investments in the "Shanghai Disneyland are positioning the company for long-term growth," said Joseph Bonner, analyst at Argus Research, who's maintaining his "buy" rating on the stock, with a price target of $129 a share. The investments in Shanghai and other projects, including the construction of the Star Wars "theme lands" in Disney World in Orlando, Florida, and Disneyland in Anaheim, California, he said, have weighed on earnings this year. However, those projects are expected to produce robust returns over the long term.

The Shanghai Disney Resort, said Pivotal Research's Wieser, is one of the "potential catalysts" on the horizon, along with the "ongoing optimism around the growth of the studio entertainment unit this calendar year -- both from new properties, such as Zootopia, and the extension of franchises, such as the next Star Wars installment, 'Rogue One.'" Wieser is also optimistic about national advertising this year, fueled in part by political spending.

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