Jessica Reif Cohen, media analyst at Merrill Lynch, raised her recommendation on DIS from “neutral” to “buy,” saying the stock’s prospects are “skewed highly positive” and that DIS is “one of the most compelling equities” among media and entertainment stocks heading into fiscal 2011 (starts in October 2010). This according to the Wall Street Journal. Ms. Cohen set a price target of $42 a share for DIS, which she expects to earn $2.45 per share next fiscal year.
The stock shot up 4.3% at the open to $32.86, a new 52-week high, before moving sideways for the rest of the session and closing at $32.57, up 2.94% for the day. Friday, DIS added another 2%.
Why is this news?
How did one analyst’s recommendation change have such a positive effect on a large-cap stock like DIS?
If the WSJ article is correct, the reasons Ms. Cohen cites for her upgrade aren’t exactly breaking new ground. They include:
–advertising recovery aiding DIS media assets
–potential consumer recovery helping the theme parks
–shakeup of the movie business maybe meaning better films, possibly starting with Alice in Wonderland and Toy Story 3 (why not Ironman 2).
Compare this with my post on DIS about a month ago. The facts are basically the same. Reading my post again, I’m a lot more tepid on the stock, even though I own it.
What I think makes this stock move interesting
1. Most importantly, people want to be more bullish than I have expected.
What separates a bull market from a bear market is how the discount mechanism works. In a bad market, investors focus on the here and now. In a bull market, in contrast, investors are willing to act today on earnings expectations that will only materialize in six months or a year.
Ms. Cohen’s positive story won’t materialize until the fall, yet the stock went up sharply on double normal volume in a basically flat market. Either Ms. Cohen’s report is the reason the stock went up, in which case investors are willing to buy earnings that are more than six months out. Or the report is the excuse buyers needed to express their bullishness. In either case, investors want to be bullish.
2. Merrill’s distinguishing characteristic is its powerful retail sales force, not its clout with institutional investors. The sales force trusts Ms. Cohen, who has been with Merrill for 16 years. DIS is an easy story to explain to retail investors, once they get it that the lion’s share of profits come from ESPN.
Retail investors have been remarkably absent from the stock market during the rise of the past year. Maybe this is a sign they’re warming up to get off the sidelines.
3. Ms. Cohen, a perennial member of the Institutional Investor All-American securities analyst team, is best known, in my view, for having superb connections with leading figures in the media and entertainment industries. Her long tenure on Wall Street gives her the ability to interpret what she hears in a sophisticated way. So far as I can see, she has no investment banking “need” to be favorably disposed toward DIS.
Why is she recommending DIS now? My guess– whether her next year’s numbers are accurate or not, I think Ms. Cohen is beginning to hear that good things are happening at DIS, which has excellent assets but which has suffered through years (lots of them) of horrible management. That may be beginning to change.
My bottom line: this is more evidence for the favorable DIS investment case.