Walt Disney Is Moping Forward

ESPN, animation, movie, and theme-park operator Walt Disney (NYSE: DIS) reported strong earnings on Tuesday. But would investing in Disney stock yield victory for your portfolio?

Disney's sales and profit for its third-quarter beat analysts’ estimates due to pay-TV fees to ESPN that offset unchanged cable advertising sales. Disney reported 11% higher net income of $1.48 billion and its $0.78 worth of earnings beat by a nickel 22 analysts’ estimates compiled by Bloomberg.

Disney's cable-network profit increased 10% and its theme park net income rose 8.8% thanks to higher ticket prices while its consumer products unit enjoyed higher profit due to sales of “Cars” and Marvel merchandise.

But does one good quarter mean you should invest? No. But here are two reasons to consider buying Disney stock:

• Inexpensive stock. Disney's price to earnings to growth (where a PEG of 1.0 is considered fairly priced) is a modest 0.93. It currently has a P/E of 15.4 and is expected to grow 16.6% to $2.98 in 2012.
• Expectations-beating earnings reports. Disney has beaten analysts’ expectations in four of the last six reporting periods.

Here are two negatives:

• Under-earning its cost of capital. Disney is earning less than its cost of capital – but it's improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of its fiscal 2011, Disney’s EVA momentum was 2%, based on first nine months' 2010 annualized revenue of $37.8 billion, and EVA that improved from negative $797 million annualizing the first nine months of 2010 to negative $125 million annualizing the first nine months of 2011, using a 9% weighted average cost of capital.
• Slow sales growth and declining profits but a stronger balance sheet. Disney has been growing with declining margins. Its $38.1 billion in revenues have grown at an average rate of 1.8% over the last five years while its net income of $4 billion has fallen at a 4% annual rate over that period -- yielding a solid 10% net profit margin. But its debt has fallen as its cash increased. Specifically its debt has declined at a 3.9% annual rate from $12.2 billion (2006) to $10.4 billion (2010) while its cash has grown at a 3% annual rate from $2.4 million (2006) to $2.7 billion (2010).

Disney is headed in the right direction -- but lacks a sense of urgency or a catalyst to invest. I would avoid this stock until Disney supplies those.