UBS Upgrades Disney To BUY After Record High Closing

Disney (DIS) hits a record high of $63.25. This is Disney’s 45% increase since the past year compared to 27% in 2013. Disney is the second-best performer on the Dow Jones Industrial Average on Monday, April 29.

UBS upgraded Disney to Buy from Neutral, with its target price raised to $72 from $55.

The UBS upgrade is largely based on “the potential for significant acceleration of return of capital, and the cusp of parks margin expansion are underappreciated by the market.” Disney’s investment in Marvel, expansions at the Disney parks, and Lucasfilm will become more monumental for its uptrend. UBS foresees that Disney is at the early stages of a multi-year upward EPS revision cycle.

Disney will further be propelled to the top due to the performance of Iron Man 3, which earned about $195.3 million in its international opening weekend compared to Disney’s previous superhero mega-blockbuster, The Avengers’ $185.1 million. The Avengers opened in three more markets compared to Iron Man 3. Disney’s lineup for the rest of the summer is expected to strengthen its stock. Monsters University, The Lone Ranger, Planes, Thor: The Dark World will be released later this year. Oz The Great and Powerful earned $481 million since its release in March this year.

Disney is a strong media stock because it is diversified. The theme parks hosted 121 million visitors in 2011. Disney subsidiaries, ABC and ESPN, are showing good performance with hit programming such as Revenge and Once Upon A Time. Merchandise and product revenues are increasing, while online and program advertising rates are generating steady revenue.

Box office hits by themselves aren’t what make Disney’s stock outperform the market, but they’re the foundation for the rest of the business to build on. The stock will outperform long-term, particularly with a slate of Star Wars films upcoming on 2015.

The only challenge is that Disney’s stock isn’t affordable by most standards. It trades at 20 times trailing earnings and only pays a modest 1.2% dividend yield. But what Disney doesn’t provide in value it provides in a competitive fort, with one of the strongest brands in the media world and a management team that knows how to generate profit from its assets. It’s this strong brand that creates the ability to charge a premium to customers and return profits to shareholders. Disney has a long history of doing both, and the latest success in the Iron Man series will continue to pay dividends for years to come.

If any stock on the market is worth paying a premium for, it’s Disney, and I think we’re entering a golden age of Disney blockbusters that will drive the next decade of outperformance on the market.

Disney is set to report its Q2 earnings on May 7. Wall Street is expecting it to post earnings of 76-cents per share, 31% higher than it did a year earlier. For 2013, analysts predict that Disney will announce profits of $3.45 a share, for earnings growth of 12.4%. If so, this mark would easily top the 8.2% EPS growth expected of the S&P 500.

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