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I want to write about one of my favorite long-term holdings, The Walt Disney Company (DIS). Disney has a fantastic business model, that incorporates theme parks, sports (with ESPN), children's shows, and cinematic movies. The list goes on, but what keeps investors on board after Disney shares gained 40% in 2012? I will attempt to break down Disney's growth and look for growth potential in the next several years.

Disney is a favorite among many long-term shareholders. How can you not love the little mouse in the house? Okay, that was a joke, but seriously, how can Disney not be a favorite among other shareholders? However, the question becomes truly mind-boggling when considering whether the growth fits the price. Does Disney trade at fair value, or is it overvalued? As much as we love the mouse, we need to take a deeper look to see.

Below are the 1-year and 3-year charts for Disney. The 1-year chart has the RSI and MACD readings, as well as the 20-day, 50-day and 200-day simple moving averages. This will show the short-term price movement for Disney. The second chart is the 3-year chart. It also has the RSI and MACD measurements, but uses the 50-day, 100-day and 200-day simple moving averages to help illustrate the overall trend of Disney. Below, the charts:

Disney 1-year Chart (click to enlarge):

Source: Stockcharts.com

Disney 3-year Chart (click to enlarge):

Source: Stockcharts.com

The 3-year chart is much more troubling than that of the 1-year. The 1-year chart displays strength and solid price action. It has indeed made short-term buyers very happy. However, there is tremendous weakness on the 3-year chart, especially around the autumn of 2011. Of course, this is when equity markets experienced huge surges in volatility, as Europe swayed from day-to-day. Regardless, violent sell-offs and high volatility is not something long-term investors enjoy, even if the broader market selling is rampant.

Getting into Disney's growth, below are two tables outlining revenue and earnings per share growth. Each table will cover a total of six fiscal years: the previous three years (2009-11), the current year (2012) and the next two future year estimates (2013-14). Below is the table for revenue growth, followed by earnings per share growth:

Revenues (In Millions):

Year

Revenues

Change ($)

Change (%)

2009

36,149

-1,694

-4.5%

2010

38,063

+1,914

+5.3

2011

40,893

+2,830

+7.4

2012

42,278

+1,385

+3.4

2013*

44,900

+2,622

+6.2

2014*

47,600

+2,700

+6

(*) = Indicates the value is derived from future estimates in the fiscal years of 2013 and 2014.

Earnings Per Share (EPS):

Year

EPS

Change ($)

Change (%)

2009

1.85

-0.43

-18.8%

2010

2.10

+.25

+13.5

2011

2.51

+.41

+19.5

2012

3.07

+.56

+22.3

2013*

3.41

+.34

+11

2014*

3.85

+.44

+12.9

(*) = Indicates the value is derived from future estimates in the fiscal years of 2013 and 2014.

Disney's revenue growth is fairly consistent. For the most part, it is in the single digit growth range. The one exception was in 2009, when Disney generated negative revenue growth from the previous year. While we like to see revenue growth in the double digits, Disney isn't your typical growth company. It is already a fundamentally sound company. It's good to see that it is continuing to grow and can hopefully continue to keep revenues growing around 7.5% per year, which is slightly below what future estimates are calling for.

While the revenue growth is in the single digits, that's not the same story for the earnings per share growth. Disney's EPS growth is in the teen figures, ranging from 11% to 22.3%. Again, the one exception was in 2009, when EPS growth contracted by 18.8%. It's important to remember that we're not looking at Disney to fit in the "growth" section of our long-term portfolio -- although it could certainly make its case for it. For me, this stock fits in the "hybrid" section.

While this may vary for other investors, I like to think of Disney as a core position, but with the potential for much more growth than the typical "core" stock. My "core" holdings are huge companies that are not going anywhere and have a solid dividend yield typically greater than 3%. A company like McDonald's (MCD) or Proctor & Gamble (PG) would fit this model.

This is why I don't think of Disney exclusively as a core position, but rather, a hybrid one. Disney has the fundamental qualities of a McDonald's or a Proctor & Gamble, but with much more growth potential. Rather than simply being a cash cow like the two former companies, Disney still has a lot of growth in the coming years.

To gather a better look at where some of this growth is coming from -- and will keep coming from -- we'll look at Disney's most recent 10K filing. Here on the 10K, we will find lots of valuable information. Here are the revenues for Disney's five different divisions:

Revenues (In Millions):

Revenues20122011Change (%)
Media Networks$19,436$18,7144%
Parks & Resorts$12,920$11,79710%
Studio Entertainment$5,825$6,351(8)%
Consumer Products$3,252$30497%
Interactive$845$98214%
Total$42,278$40,8933%

Source: Disney 10K

The figures above show modest growth in Disney's main operations. Of the 3.4% increase in total revenues for 2012 (which can be found the first table of the article), 3% came directly from the operations listed above. For 2013 and 2014, total revenues are expected to grow 6.2% and 6%, respectively. Look for the above operations to grow as well and account for most of this growth.

Now looking towards cash flow, we can examine Disney's net income. Investors can get a better picture of how profitable a company actually is when examining the cash flow statement. We'll look at the annual net income for the previous 4 years (2009-12). Below, Disney's net income:

Net Income (In Millions):

Year

Net Income

Change ($)

Change (%)

2009

3,609

N/A

N/A

2010

4,313

+704

+19.5%

2011

5,258

+945

+21.9

2012

6,173

+915

+17.4

Disney's net income is impressive, as it has grown around 20% per year over the last several years. I expect this trend to continue, especially since they are such a well diversified company. some will argue that cash from operating activities is a more important measure than net income, so below I will include that for those investors as well. Below is the operating cash flow from the last four years (2009-12):

Cash From Operating Activities (In Millions):

Year

Cash From O.A.

Change ($)

Change (%)

2009

5,319

N/A

N/A

2010

6,578

+1,259

+23.67%

2011

6,994

+416

+6.3

2012

7,966

+972

+13.9

Disney sports solid growth when analyzing the cash generated from operating activities. Overall, I think Disney presents a great opportunity to find a solid stock with a diversified portfolio of profit generating assets. This allows investors to find a company that is fundamentally sound, while still offering great future growth potential.

Now all of this is nice, but how much does Disney cost? I'm not talking about the share price, but rather, the valuation. Disney is currently trading with a trailing twelve month ((ttm)) P/E ratio of 16.2. When looking out further to 2013 and 2014, the P/E ratio drops down to 14.9 and 13.2, respectively. The P/E measurements would suggest that Disney isn't overpriced, but is in-line with industry peers. The industry (Broadcasting and Cable TV) has a ((ttm)) P/E ratio of 16.3.

To take it one step further, I will examine the PEG ratio. The PEG ratio divides the P/E ratio by the annual EPS growth. This is convenient for evaluating a company's valuation, relative to the growth. Below is the PEG ratio for 2013, 2014 and 2017.

Time Frame

PEG Ratio

1-Year

1.35

2-Year

1.02

5-Year

1.30

Note: The 5-year PEG ratio is from Yahoo! Finance

A PEG value of 1 would indicate a fairly priced stock. A value over 1 would indicate a potentially overvalued stock price and a value under 1 would indicate a potentially undervalued stock. Disney has a PEG ratio of 1.02 for the 2-year time frame, indicating that it is potentially fairly valued relative to its future growth.

Finally, I have a table below of other key metrics for Disney. This includes several obvious, yet important figures that investors, or potential investors should be aware of. Below is my table of key metrics:

Market Cap

$90.1 Billion

Dividend (Annual)

$0.75

Yield

1.5%

Long-Term Debt

$10,981 Million

Short-Term Debt

0

The figures above represent some important factors for the company that I did not go over in more depth. One thing investors might not look at often is a company's debt. The long- and short-term debt can be found on a company's balance sheet and it isn't always a bad thing. As a matter of fact, it typically isn't, although it's nice to find a "0" in the long-term debt column when looking for companies to invest in.

Overall I think Disney has appreciated rapidly over the last year. While it could be slightly overvalued right now, I think it offers an excellent entry point for those looking to get long. Whether holding for several decades, or just the next couple of years, I expect Disney to perform well and continue generating respectable returns for shareholders, from both the dividend and share price appreciation.

Source: Disney: Has The Mouse Outgrown The House?