Walt Disney Has Significant Upside Potential

Sep. 6.11 | About: The Walt (DIS)

The Walt Disney Company (DIS), founded in 1923, is one of the world’s leading providers of entertainment services. The company uses its portfolio of brands to differentiate its content, services and consumer products. Burbank, California-based company operates in five segments: Media Networks segment, Consumer Products segment, Studio Entertainment segment, Parks and Resorts segment, and Disney Interactive Media Group segment. The company intends to maximize earnings and cash flow, and allocate capital toward growth initiatives.

As of Sep 3rd, Walt Disney stock was trading at $32 with a 52-week range of $29.6 – $44.34. It has a market cap of $58.6 billion. Trailing twelve month P/E ratio is 13.7, and forward P/E ratio is 10.8. P/B, P/S, and P/CF ratios stand at 1.5, 1.5, and 8.6, respectively. The 3-year annualized revenue and EPS growth stand at 2.3% and -3.2%, respectively. Operating margin is 18.2%, and net profit margin is 11.3%. The company has a low debt-to-equity ratio of 0.2. Walt Disney has a yield of 1.2% for its shareholders.

Walt Disney has a 4-star rating from Morningstar. While its trailing P/E ratio is 13.7, it has a 5-year average P/E ratio of 15.6. Out of 28 analysts covering the company, 10 have buy, 5 have outperform, and 13 have hold ratings. Wall Street has diverse opinions on Walt Disney’s future. The bottom line is 11.6% growth, whereas the top-line growth estimate is 31.5% for the next year. Average five-year annualized growth forecast estimate is 13.1%.

What is the fair value of Walt Disney given the forecast estimates? In this article, the 21st in the series, I will show a step-by-step calculation of Walt Disney’s fair value using discounted earnings plus equity model.

Discounted Earnings Plus Equity Model

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value

V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r

While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.

Walt Disney’s Valuation

Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate.

Since we are in the middle of the year, it will be more feasible to take the average of ttm EPS of $2.36 along with the mean estimate of $2.92 for the next year.

E0 = EPS = ($2.36 + $2.92) / 2 = $2.64

Wall Street holds diversified opinions on Walt Disney’s future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 13.1%. Book value per share is $21.39.

The rest is as follows:

Fair Value Estimator





E0 (1+g)/(1+r)




















Fair Value Range

Lower Boundary


Upper Boundary




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I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my 5 year discounted-earnings-plus-book-value model, the fair-value range for Walt Disney is between $42.97 and $64.36 per share.

As of Sep 3rd, Walt Disney was trading at a price of $32. I like Walt Disney as a company. The company has diversified and enjoyable products. I see great growth potential, as well. The market does not seem to appreciate Walt Disney’s growth potential. The current price of $32 indicates the stock is deeply undervalued. Based on my FED+ fair value estimate, Walt Disney is almost significantly cheaper than my fair-value range. The stock has 101% upside potential to reach the upper boundary of its fair value range.

O – Metrix Confirmation

If the math above looks too complicated for you, try estimating the fair value using the O-Metrix as such:

O-Metrix = [(Dividend Yield + Growth Estimate) / (P/E Ratio)] * 5

  • Dividend Yield: Higher is better.
  • EPS Growth: Higher is better.
  • P/E Ratio: Lower is better.

The back-testing of this valuation technique on 40 large-caps shows that O-Metrix works very well over the long-term, such as five years. I am also continuously checking on specific sectors, and the formula works very well so far.

What is the O-Metrix Score?

  • Walt Disney has a yield of 1.2%. Therefore the yield is 1.2.
  • Growth estimate is the same as the discounted earnings model and is equal to 13.1%.
  • Since we are at the middle of the year, taking the average of ttm (13.7) and forward (10.8) P/E ratios will smooth the results. Thus, the average P/E ratio to be used in the model is 12.25.

O-Metrix = [(13.1 + 1.2) / (12.25)] * 5 = 5.84

Depending on the benchmark chosen, the market has an O-Metrix score range between 4 and 5. Walt Disney's O-Metrix score of 5.84 is in the fair-value range. Back-testing of this ranking system shows that companies with higher-than-average O-Metrix scores beat the market with lower volatility. At a price of $32, the company is trading within the upper end of C-Grade, average-return zone.

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Walt Disney’s stock has been priced at a premium due to its popularity. The average P/E ratio in the last 5 years was 15.6. It is trading with a low P/E ratio of 13.7, and forward P/E ratio of 10.8. With a profit margin of 12.37%, Walt Disney offered 1.2% dividend yield last year. In the last 5 years annualized EPS growth was 11.37%. With a market cap of $58.6 billion, I expect the growth to keep its pace.

As of Sep 3rd, Walt Disney was trading at $32, lower than my fair-value range of $42.97 and $64.36. The stock has a low PEG ratio of 0.96. Its price to book ratio of 1.6 is also below the market. The stock has a slightly low total debt/equity ratio of 0.2 and Beta of 1.18. The stock has 101.11% upside potential based on 13.1% EPS growth estimate. I would prefer this stock. It pays substantial dividends and priced with a low P/E ratio. The stock lost 25% since its peak in May. I think the current price offers a suitable entry point.

You can download FED+ Fair Value Estimator, here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.