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Disney (NYSE: DIS), the place where dreams come true, currently appears to be a dream stock for traders. With an upbeat fundamental outlook, shares appear on the verge of a bullish technical breakout -- and could hit a new all-time high.
The entertainment empire is on the rise following recent news the company is releasing a new video game platform, called Disney Infinity. The gaming system enables actual Disney figurines to be docked into a video game console. Players can then customize the game content based on the figures plugged in.
This interactive gaming system bears a remarkable similarity to Activision Blizzard's (NASDAQ: ATVI) Skylanders video game platform in that physical toys are used to connect into a virtual game world. The "plug and play" idea appears a profitable one. Activision recently reported U.S. sales of Skylanders hit over $500 million.
However, where Disney will likely take the cake from Activision is in its power to bring a much larger collection of characters into the games. When the Infinity system is released in June, it will be made available with three characters: Captain Jack Sparrow from "Pirates of the Caribbean," Sulley from "Monster's University" and Mr. Incredible from "The Incredibles." And an additional 17 figures will also be available for purchase.
Plus, as new movies and Disney products come out, they will likely be accompanied by fresh Disney Infinity toy figures. The possibilities really will be endless. And Disney can easily target its market by advertising the company's new gaming system through its own TV channels.
It's important to note, the Disney Infinity game system is being released under the company's Interactive Division. This was the only Disney division that didn't record a profit in fiscal 2012. In fact, the division has been unprofitable for the past 16 consecutive quarters, losing over $1 billion since fiscal 2008. However, this new gaming system looks set to turn things around.
Industry analysts certainly appear optimisic. Due to the expected success of the new video game platform, Deutsche Bank (NYSE: DB) projects sales in Disney's Interactive Division will increase over 20% in fiscal 2013.
The technicals support these bullish expectations.
In early October 2011, the stock hit a multi-month low near $28. However, quickly recovering from this low, shares formed a major uptrend, surging to an all-time high of $53.40 by September 2012.
From there, the stock had trouble sustaining momentum. Shares quickly dipped to a low of $45.83 in October, before finding support at this level. In their fall, the major uptrend line was bearishly broken and a minor downtrend line formed.
However, since hitting this low, the stock has been on a steady climb. The minor downtrend line was bullishly broken, and a minor uptrend line has since formed. During the last trading week in 2012, shares approached their all-time high, hitting slightly below at $52.33. DIS is currently trading near this level -- and above the minor uptrend line -- at around $52.40.
If the stock can sustain this momentum, it could easily challenge resistance, near the all-time $53.40 high. In this case, a small ascending triangle pattern would be bullishly completed and the stock could surge to a fresh all-time high.
According to the measuring principle for a triangle -- calculated by adding the height of the triangle to the breakout level -- the stock could reach a new price target of $60.97 ($53.40-$45.83 = $7.57+$53.40 = $60.97). At current levels, this target represents about 16% returns. However, with no historical resistance in sight, shares could move much higher.
The bullish technical outlook is supported by strong fundamentals. Upcoming quarterly results, to be reported Feb. 5, appear solid. Analysts’ project revenue for the period will ramp up 4.2% to $11.23 billion, from $10.78 billion in the comparable year-ago period. Based, in part, on anticipated sales of the Disney Infinity game system, analysts expect a 6.2% revenue gain in full-year fiscal 2013, ended in September, with sales topping $44.91 billion, compared with $42.28 billion last year.
The earnings outlook is similar. Although upcoming quarterly earnings are expected to dip slightly, to $0.77 per share, from $0.80 per share in the year-ago period, they are expected to rise for the full fiscal year. Due in part to expected demand for the new gaming system, analysts' expect fiscal full-year 2013 earnings will jump 11% to $3.41, from $3.07 in the prior year-ago period. Additionally, the company offers an attractive forward annual dividend of about 1.5%, or $0.75 per share.
Based on this upbeat fundamental outlook, supported by strong technicals, I plan to go long Disney stock.
Risks to consider: Disney's Interactive Division does not have a strong track record. The division has accumulated over $1 billion in losses in the past four years. It's anticipated the new gaming system will turn things around. But there's no guarantee. However, the similar Activision system has been a hit with game players so far, and its likely Disney's system will be equally, if not more popular.
Recommended Trade Setup:
-- Buy DIS on a break above $53.40 resistance-- Set stop-loss at $45.81, slightly below current support-- Set initial price target at $60.97 for a potential 14% gain by mid-2013
While the sector is hanging on by a thread, shares of this company have already started breaking down.
As the broader market bull looks ready to be put out to pasture, shares of this company are poised for a rebound.
The way I see it, either the fundamental story or the technical breakout should be enough for us to capture a potential 17.6% gain in the next few months.