Is Disney Stock Undervalued at Current Prices?

With shares of Disney (NYSE:DIS) trading around $60, is DIS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Disney is a diversified worldwide entertainment company. The company operates in five business segments: media networks, parks and resorts, studio entertainment, consumer products, and interactive. Disney offers entertainment that sends smiles to consumers across a range of countries around the world. Its movies and shows, theme parks, and products have remained a main attraction for many years and will continue well into the future.

Just recently, Disney has managed to beat Wall Street's expectations of earnings despite taking a massive hit on a floundering Lone Ranger movie. For the quarter the company estimated a 36 percent loss in operating revenue due to the film, and projects a loss on the film of $160 to $190 million in the fourth quarter.

T = Technicals on the Stock Chart Are Mixed

Disney stock has been exploding higher, in recent years. The stock is currently breaking down from a consolidation near highs so it may need some time to recover. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Disney is trading between its key averages which signal neutral price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Disney options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Disney Options	22.85%	50%	49%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
September Options	Steep	Average
October Options	Steep	Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Disney’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Disney look like and more importantly, how did the markets like these numbers?

	2013 Q2	2013 Q1	2012 Q4	2012 Q3
Earnings Growth (Y-O-Y)	0.00%	31.75%	-3.75%	17.34%
Revenue Growth (Y-O-Y)	4.42%	9.61%	5.21%	3.42%
Earnings Reaction	-1.70%	-0.12%	0.42%	-5.95%

Disney has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have not been pleased with Disney’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Disney stock done relative to its peers Dreamworks (NASDAQ:DWA), Time Warner (NYSE:TWX), Twenty-First Century Fox (NASDAQ:FOXA), and sector?

	Disney	Dreamworks	Time Warner	Twenty-First Century Fox	Sector
Year-to-Date Return	22.04%	72.06%	26.70%	41.50%	33.79%

Disney has been a poor relative performer, year-to-date.

Conclusion

Disney is a global media company that provides entertainment to consumers around the world. Investors have not been pleased by a recent earnings release. The stock has been exploding higher — however, it recently broke below a consolidation range so it may need time to recover. Over the last four quarters, earnings and revenues have been rising but investors have grown to expect more from the company. Relative to its peers and sector, Disney has been a weak year-to-date performer. WAIT AND SEE what Disney does this coming quarter.