Top 10 EPS Growth Stocks

In today’s market, many companies are reporting stagnant earnings due to labor troubles, inflation and a host of other factors. Some, however, have the potential to generate explosive earnings growth over the next five years.

Below are the top 10 stocks to watch for earnings per share (EPS) growth, listed along with their projected 5-year compounded annual growth rates:

• AstraZeneca (NASDAQ:AZN): 151.0 percent
• Workday (NASDAQ:WDAY): 118.9 percent
• MercadoLibre (NASDAQ:MELI): 107.9 percent
• Disney: (NYSE:DIS): 50.5 percent
• ServiceNow (NYSE:NOW): 49.5 percent
• Core Laboratories (NYSE:CLB): 42.3 percent
• MTU Aero Engines AG (OTC:MTUAY): 38.5 percent
• Ayden NV (OTC:ADYEY): 31.0 percent
• Chipotle Mexican Grill (NYSE:CMG): 30.4 percent
• Autodesk (NASDAQ:ADSK): 29.8 percent

The Top Value Among Fast-growing Companies

While earnings growth is crucial to driving a stock’s price higher, it’s also important for investors to pay a fair price for the discounted value of future earnings. Interestingly, one of the stocks that made the list of the top 10 also appears to be significantly undervalued: Disney.

To begin with, Disney’s P/E ratio is currently 23.2, which is slightly below the S&P 500 average of 25.8. While this is far from a shocking value indicator in and of itself, it’s worth considering this ratio in the context of Disney’s  projected long-term earnings growth.

On the 12-month horizon, Disney trades at 1.96 times its expected earnings growth, which is quite high. Using the 5-year growth rate of 50.5 percent, however, the stock is priced at just 0.46 times its projected annual growth rate. Based on this alone, there’s a strong case to be made that Disney is significantly undervalued. 

A discounted cash flow analysis adds further support to the case for undervaluation. Using Disney’s last full fiscal year earnings of $2.25, a 5-year growth rate of 50.3 percent and a discount rate of 11 percent, the stock’s fair value would be about $124 per share. Given the most recent price of $86.47, this would mean that Disney shares are undervalued by an astonishing 43 percent. 

Disney’s Recent Performance

In its Q2 earnings report, Disney detailed quarterly revenues of $21.82 billion, up 13 percent from the previous year. Diluted EPS rose from just $0.26 to $0.69 on a year-over-year basis, providing strong evidence that Disney may be recovering from its pandemic-era malaise. Encouragingly, revenue from the parks and experiences segment rose 17 percent. 

Turning to a longer-term picture, it’s clear that Disney still has a long way to go before achieving a full recovery. The last year’s EPS of $2.25 is less than half of the $5.94 the company reported in Q4 2019, the last quarter of regular business prior to the lockdowns of 2020-21. This dip in earnings, however, is what has created such a large potential value opportunity in Disney stock. 

The drop in earnings has coincided with falling net margins. From 2010 to 2019, Disney’s net margins consistently exceeded 10 percent. Today, the company’s net margin is just 4.7 percent. While this metric has improved, it’s still far from its historical level.

Box Office Failures Weigh on Disney

The most pressing risk for Disney investors is its recent string of box office failures. While any studio is bound to have some flops among its releases, Disney seems to have lost its magic touch over the past year.

Over its last eight major studio releases, the company is estimated to have lost at least $900 million at the box office. Among the worst of these was its recent film Elemental, which brought in only $29 million on its opening weekend despite a production budget of $200 million.

Clearly, Disney will have to turn this run of negative results around in order to achieve its projected earnings growth rates.

Another possible concern for investors comes from Disney’s slowing revenue growth. While it’s completely expected that the company would not match the revenue growth seen in the early stages of reopening from the pandemic, Disney has also slowed significantly from the growth rates it posted in 2019. With revenues still increasing at double-digit rates, however, this concern seems to be a fairly minor one. 

Disney has also had to spend down a considerable amount of its cash reserve in order to weather the challenges of the last few years. The company ended its last fiscal year with $11.62 billion in cash, compared to $17.91 billion in 2020.

Though the company obviously had to spend its way through a tough period at the turn of the decade, this weakening of Disney’s balance sheet may be a concern for some investors. The company’s debt-to-equity ratio of 0.44 is also somewhat high, though the company seems to be able to manage its debts without difficulty as long as it doesn’t rely on further borrowing to fund operations. 

Is Disney Stock a Buy?

Despite its box office struggles and slow recovery, Disney is still a powerhouse business that could be a good investment for those willing to buy and hold the stock.

With a 26 percent market share in North American box offices, a leading streaming service business and a massive portfolio of intellectual properties, Disney still appears to have a strong moat that may keep it at the forefront of the entertainment industry for the foreseeable future.

Disney is also in good hands at the moment, as former CEO Bob Iger returned to the company in November of 2022. Iger headed Disney for 15 years, seeing it through one of the best growth periods in its history. With his leadership, there is a good chance that Disney can turn its production troubles around. 

Given that Disney also appears to be fundamentally undervalued, there’s a great deal for investors to like about the entertainment giant at the moment. While there certainly is some risk in Disney stock, the potential reward may make it a worthwhile investment for those seeking both growth and value.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.