Disney Investment Thesis: Strong fundamentals with identifiable catalysts make DIS the choice among big-cap entertainment stocks despite its premium valuation compared to its peers.
I’ve been very close to taking a long position in Disney (DIS) over the past couple of months. My working thesis has been that fundamental momentum is the strongest at DIS among the major entertainment companies justifying the slight valuation premium on 2005 operating cash flow. Furthermore, operating momentum is strong enough that consensus estimates could prove low….

….Finally, DIS has identifiable catalysts including the opening of the Hong Kong Disney park (under budget), a pickup in international travel in Orlando due to the weak dollar, and the start of the upfront market for broadcast TV in May where ABC will get their first significant identifiable benefits from its renewed ratings strength. Though still a long shot, a new deal with Pixar (PIXR) would be greeted well on the Street.
DIS trades at slightly less than 10 times 2005 operating cash flow, about a 10% premium to Time Warner (TWX) and Viacom (VIA). However, if fundamentals hold, DIS should have faster growth in 2006 which means the premium narrows. If operating momentum remains intact and DIS meets Wall Street estimates, the shares could trade into the low $30s. The bottom line is that DIS is the cleanest story in big cap media with the best fundamentals and clearly-defined catalysts. Sometimes you get what you pay for.