Global media and entertainment conglomerate Disney (NYSE: DIS) seems to offer an attractive risk-return when the share price is at about $100. Disney has outperformed the broader market the last 10 years, 5 years, and 2 years measured against the S&P 500 index. However, it has underperformed the last year.

Many attribute the relative underperformance to recent earnings misses and uncertainty surrounding ESPN. I assume these uncertainties are at least partly included in the updated consensus forecast. I have created a forecast that is somewhat more conservative than the consensus forecast, and I have calculated fair value using both the discounted cash flow method and the dividend growth model. Both valuation methods indicate shares offer an attractive risk-return when the share price is around $100.

**Forecast assumptions**

I have created a forecast based on Disney's historical financial performance and current consensus forecast. I have used the free Equity Analysis Model from SimulationFinance to generate this analysis, and the charts are available here. I have used this Google spreadsheet to extract historical financial data for Disney from Google Finance. The below image shows the historical financial data pasted into the Equity Analysis Model.

I then clicked the Generate forecast button to create an analysis based on extrapolation of the historical development. This will create forecast assumptions based on the historical trends. It will also calculate historical standard deviations and correlations used in the analysis to create fan charts and distribution charts. I will change some of the forecast assumptions further down in this analysis. After having automatically generated forecast assumptions based on the historical development I then manually change some forecast assumptions to reflect the consensus forecast. The below image shows LinkedIn consensus forecast from 4-traders.com.

The below images from the Equity Analysis Model shows the forecast assumptions used in the calculation. The forecast assumptions are adjusted using the Adjust button to reflect the current consensus forecast.

I have assumed a base case EBITDA margin of 30% which is about the average experienced EBITDA margin the last years. In the below table I have summarized the 2015 EBITDA margin for some media companies. Comcast (NASDAQ: CMCSA), Time Warner Inc. (NASDAQ: TWX), CBS Corporation (NASDAQ: CBS), and Netflix (NASDAQ: NFLX). Source: 4-traders.com.

I have assumed that yearly capital expenditures after the first forecast year is $4.4 billion which is about $400 million above consensus. I have assumed that Disney repurchases 15 million shares each quarter. It is assumed that this repurchase is done at a price of $100 per share. The below table from gurufocus shows the historical development in shares outstanding.

**Forecast**

All the tables and charts below are from the analysis calculated in the Equity Analysis Model. The below table shows my forecast on an annualized basis.

Consensus forecast revenues in 2018 is $62.2 billion and my revenues forecast for 2018 is $57.5 billion. Consensus forecast net income in 2018 is $10.4 billion and my net income forecast in 2018 is $10 billion. The negative Financing cash flow is from assumed dividend and share repurchase.

The below chart shows the historical and the assumed future revenues and EBITDA. Historical data with dark columns and the forecast data with light columns.

The below chart shows the historical and the assumed future earnings per share and assumed future semiannual dividends.

The below chart shows the assumed future yearly earnings per share and cash earnings per share.

The below chart shows the assumed future yearly price over earnings per share and price over cash earnings per share.

**Valuation based on discounted cash flow**

Based on the discounted cash flow valuation method, assuming a weighted cost of capital of 8% and perpetual growth of 4% from the end of 2021. The below chart shows the calculated fair value per share based on the assumptions above. That is, the fair value per share is about $120 (the column to the right). Current share price is about $100.

**Confidence analysis**

The Equity Analysis Model allows to include uncertainty assumptions in the forecast, that is, standard deviations and correlations. In this example, they are automatically calculated based on the historical financial data. Calculated quarterly historical standard deviation in revenues is 7.4%. Calculated quarterly historical standard deviation in costs is 8.8%. Calculated correlation between revenues and costs is 0.63. The Equity Analysis Model calculates multiple scenarios based on these standard deviations and the results is available in fan charts and distribution charts.

The below chart shows the historical and the assumed future revenues with uncertainty assumptions.

The black line shows the historical development, and the dotted line shows the main case assumed future development. The darkest blue area shows the range containing 75% of the calculated outcomes. The two darkest blue areas combined shows the range containing 90%, and the total blue area shows the range containing 95% of the calculated outcomes.

The below chart shows the assumed possible development in the EBITDA margin.

The below chart shows the assumed possible development in earnings per share.

The below chart show the calculated fair value per share range. The percentages on top the columns shows the accumulated probabilities from the left. That is, the value per share range is between $12 and $264 per share. The majority of the fair value calculations are between $62.9 and $163.71. This latter range captures about 90% of the calculated outcomes.

The horizontal axis shows the distribution of calculated fair value per share, and the vertical axis shows the probability of each outcome. The percentages on top of the bars have been chosen to show the accumulated probability, starting from the left. That is, it is about 40% probability that the fair value per share is below $113.3. Current share price is about $100.

**Valuation based on future dividend**

It is not straightforward doing a valuation analysis of Disney assuming the dividend growth model as the dividend growth is higher than the assumed weighted cost of capital, and it does not capture the share repurchase effect. I still assume a weighted cost of capital of 8% and perpetual growth of 4% from the end of 2021.

The below chart shows the unadjusted calculated fair value per share using the dividend growth model. The fair value per share is about $37 (the column to the right).

The above analysis does not include the share repurchase and the decreasing number of shares outstanding.

If I assume that all shareholder cash return was dividend instead of dividend and share repurchase then the dividend would be about 80% of net profit. The below chart shows the adjusted dividend calculated fair value per share using the dividend growth model. The fair value per share is about $119 (the column to the right).

The below chart shows the calculated fair value per share range in the adjusted dividend example. The percentages on top the columns show the accumulated probabilities from the left. That is, the value per share range is calculated to be between $42 and $234 per share, and the majority of the fair value calculations are between $63.4 and $170.27. This latter range captures about 90% of the calculated outcomes.

That is, the calculated fair value and fair value range is about the same as when using the discounted cash flow method.

**Valuation if lower EBITDA margins**

To test the valuation for sensitivities in future margins I update the forecast assuming that the EBITDA gradually decreases to 25% from the current level of about 30%. The image below show the assumptions change made.

The below chart shows the new assumed possible development in the EBITDA margin.

The below chart shows the new assumed possible development in the earnings per share.

The below chart shows the new calculated fair value per share based on discounted cash flow. The fair value per share is about $95.6. Current share price is about $100.

The below chart shows the new calculated fair value per share range.

That is, the value per share range is between $0 and $207 per share. The majority of the fair value calculations are between $462 and $161. This latter range captures about 87% of the calculated outcomes.

**Summary**

Disney is a global media and entertainment conglomerate with a lot of valuable brands. Assuming they are able to continue to manage these brands effectively and selectively add new brands they should be able to continue their growth. It is also fairly reasonable to assume that they should be able to be among the companies in their industry with the highest margins. I believe Disney offer an attractive risk-return when the share price is at about $100.

**Disclosure:** I/we 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.