Company Diagnostic Of Walt Disney Co.

Feb.25.14 | About: The Walt (DIS)

Company Diagnostic Walt Disney Co. Overall Rating ★★★☆☆

Closing Price $80.25
Fundamental DCF Value Sell
Relative Value Sell
Technical Analysis Sell
Growth & Dividends ★★★
Investment Returns
Debt Levels ★★★★★
Profitability ★★★★
Liquidity Ratios ★★
Insider Transactions ★★★★★
Click to enlarge

Description

The Walt Disney Company (NYSE:DIS) operates as an entertainment company worldwide. The company operates in five segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive. The company was founded in 1923 and is based in Burbank, California.

Valuation

Fundamental DCF Value

We employ a multistage DCF model, which aims to deliver an approximation of the fair value of the share price. We used a short-term growth of 7.43% decreasing to a long-term growth of 2% within the next 10 years in our Discount Cash Flow valuation model. Based on the DCF model, the fair market price of Walt Disney Co. stock is $80.79. The company is currently trading at $80.25. For this stock we use a safety margin of a 20% discount, meaning that we will be looking to buy the stock at levels below $64.63. Based on the relative analysis we issue a sell recommendation.

Relative Value

In determining the company's fair share price using relative analysis, we took the price ratios of the industry average. The share estimate when averaging the different estimates is $76.49. We apply 25% discount on each estimated price. Based on the relative analysis we will be looking to purchase the stock below $57.37. Based on the relative analysis we issue a sell recommendation.

PRICE RATIOS COMPANY INDUSTRY PRICE
Current P/E Ratio $21.98 $19.12 $69.81
Price/Sales Ratio $3.15 $2.54 $64.71
Price/Book Value $3.17 $3.26 $82.53
Price/Cash Flow Ratio $15.22 $16.86 $88.90
Average Price $76.49
Click to enlarge

Technical Analysis

The company trades above its 50 and 200 day-Simple Moving Average which is perceived as a bullish indicator. The stock is trading close to its average volume levels. The Relative Strength Index is at 69.45 which indicates the stock is very close to being classified as overbought. The short ratio is relatively low indicating little effect on the price. It should be noted however, that high short ratio may be viewed as a contrarian bullish indicator, especially if the days-to-cover are more than 8.

The company is trading at all-time high but currently is overbought. Several factors pinpoint to such conclusion. We will expect a pull back to the $75-76 price level before any reaching for higher grounds.

Financial Analysis

Growth & Dividends

We are not impressed with the historical sales growth over the last few years. We will be looking for any management hints that suggest further revenue growth: introduction of a new product, acquisition or geographical location. The company's presence in China is one of the areas we will be monitoring. Projected net income growth is above our expectation which is really good sign that the company may have found new ways to increase revenues. The company has increased their dividend over the years. We look at that trend as beneficial for the shareholders.

Current income growth is impressive. With 32% increase in the total earnings and double digit growth in all segments, Disney clearly has a momentum. We will be following closely to see whether the growth is accidental or consistent. Big part of the registered growth is due to the success of the Disney Animation's "Frozen", "Thor: The Dark World" and of course "Saving Mr. Banks".

Although the fundamental & technical analysis currently determines Disney as an overvalued stock, we believe the company is very well positioned for exponential growth. The main reasons behind our belief are not only the success of Tokyo Disney Resort but also the fact the company is a leader in the franchise film industry. The last few years have been tremendous success for franchise films and this trend is most likely continue. We will be looking at how well these pictures will be doing:

· "Captain America: The Winter Soldier" opens on April 4th;

· "Guardians of the Galaxy" opens in August;

· And in a distant future, claimed to be one of the biggest openings ever: "Star Wars: Episode VII" opens in December 2015;

To keep things in balance, Disney's broadcasting segment was not profitable. It is not very clear if the reason is increased cable network expenses and/or lower ratings of some of the broadcasted shows. We will be looking at the expense level to see whether they are forming a trend.

Investment Returns

The company's return on equity does not impress. With only 15% return the company needs to work on increasing the figure. One way to boost their return besides increasing the profit margins is through share repurchases. In fact this action can be looked at favorably by the investors if there are no other profitable projects to invest in. And indeed, during the last quarter the management increased the pace of share repurchase by buying back 25.3 million shares for about 1.7 billion dollars. For the fiscal year-to-date, Disney have repurchased 33.7 million shares.

However, we will test the quality of the equity return by comparing it to another measurement of return: the return on investment. The return on investment is below expectations and this is an area which Walt Disney Co. needs to address. The company should concentrate on some of the following strategies in order increase their return on investment: increase the price per unit, increase the sales per unit, slash costs and/or decrease the debt levels.

Let us look at the gap between the return on equity and return on investment. If the difference is significant it is likely that the company has unhealthy level of debt on their books that need to be reduced. The difference between both returns is not that substantial. This speaks of high quality returns and healthy debt levels. The debt levels are reviewed below but I do not expect them to be off the charts.

Debt Levels

Walt Disney Co. has healthy debt levels. In fact they may even borrow a bit more in order to finance profitable project, which would help them maximise their revenues. It should be noted that return on the investment should exceed the cost of borrowing at all times.

Profitability

Gross Margin

The gross margin is not where we would like to see it. Although the level of 21.8% is in line with the industry one, there is definitely room for improvement. More importantly the gross margin experiences an upward trend which is a very positive sign. It shows the ability of the management to control the production costs by securing extra funds for marketing and R&D.

Operating Margin

Operating margin level is quite high. The company makes decent money on each dollar of sales. The operating margin experiences an upward trend which is an indication that Walt Disney's sales are increasing faster than costs. Company's operating margin exceeds the industry one.

Net Profit Margin

Net profit margin can be quite volatile and also vary from business to business. Walt Disney's net margin meets our expectations. It is also above the average for the industry. This level of margin is comforting and it is a clear indicator that the company has a clear advantage over its competitors.

Liquidity Ratios

Current Ratio

The current ratio is below the desired level. With the ratio of 1 the company cannot meet their short term obligations if they have to be paid back within a year. Walt Disney Co. needs to improve their cash management i.e. shorten the receivables period or optimize their inventory levels.

Quick Ratio

The quick ratio is above the desired levels. The company is able to meet their short term obligations with their most liquid assets.

Ownership

There is a large institutional ownership which indicates strong corporate governance. An insider recently bought some shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.