Disney Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Today, Walt Disney (NYS: DIS) suffered its worst one-day loss in a decade, losing as much as 13% of its market cap before recovering a bit by trading day end.

So what: If that surprises you, well, join the (Mickey Mouse) club. Far from missing on earnings last night, Disney reported a respectable 11% rise in second-quarter profits. Earnings of $0.77 per share exceeded analyst estimates, and revenues beat as well.

Now what: As for me, I've got an entirely different worry: valuation. On the surface, Disney shares seem attractively priced at 14 times earnings, with long-term growth prospects of nearly 15%. Problem is, Disney's earnings aren't all their cracked up to be -- and its price doesn't reflect the true cost of the company. Value Disney on its inferior free cash flow ($3.7 billion, versus $4.6 billion in claimed net income), and factor its $9.7 billion net debt load into its price, and what you wind up with is an enterprise value nearly 19 times annual cash profits.

Seems to me, the House of Mouse is a bit pricey for this market. My advice: Don't get stuck with the mortgage.

Curious to see how this movie ends?Add Disney to your Fool watchlist.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any stock named above, butMotley Fool newsletter serviceshave recommended buying shares of Walt Disney. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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