Disney shares stumble as expectations outpace reality

Wed May 11, 2016 12:22pm EDT
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By Narottam Medhora and Anya George Tharakan

(Reuters) - For Walt Disney's Peter Pan, flying was "all a matter of faith and trust." Investors in Walt Disney Co showed a lack of both in the company's stock on Wednesday.

Disney's shares fell 4.5 percent to $101.76 in morning trading and were the biggest drag on the Dow Jones industrial average after the entertainment conglomerate's quarterly earnings and revenue fell short of sky-high estimates.

As expected, Disney did get a boost from the success of the animated hit film "Zootopia" and "Star Wars: The Force Awakens".

But its cable business continued to struggle, theme park attendance was weaker than expected and product sales fell, leading to first miss on earnings per share in 19 quarters.

"We believe the nature of Disney's franchises like Star Wars has resulted in expectations running ahead of reality," Barclays analyst Kannan Venkateshwar wrote in a note to clients. Venkateshwar rates Disney "underweight" on valuation, with a price target of $89.

Disney has a forward price-earnings ratio of 17.3, compared with an average 14.4 for its peers.

Thomson Reuters StarMine's intrinsic valuation model, which takes into account analysts' EPS forecasts, indicates Disney's stock should be trading at $98.12 - about $4 below where it was trading on Wednesday.

"We are reluctant to pay a significant premium to the group average (and market) for Disney given that historical and projected growth rates have not generally been superior to peers," wrote Cowen & Co analyst Doug Creutz, who maintained a target of $88 on Disney's shares.   Continued...

The entrance gate to The Walt Disney Co is pictured in Burbank, California February 5, 2014.  REUTERS/Mario Anzuoni