Disney Is Not Overvalued

| About: The Walt (DIS)

Summary

It has been stated recently that Disney is an overvalued or fully-valued stock.

I think that, on the contrary, Disney is significantly undervalued.

I recently became a shareholder in the conviction that Disney is currently trading below fair value.

In an article I wrote in May about the Walt Disney Company (NYSE:DIS), I wrote the following:

At its current valuation of around $100 at a price-to-earnings ratio of 18.76, Disney offers a 1.41% dividend yield and a payout ratio of 25.40%...The company is offering an attractive price for prospective investors to start a position and for current investors to consider increasing their current one.

Now, a little over two months later, there are analysts who believe that Disney is overvalued. Donald Thompson Jr. wrote a very good analysis of Disney, contending that fair value for Disney is $90 per share. The article: Disney - A Well Oiled Growth Machine, is worth your time, and while I disagree with Mr Thompson's conclusion on valuation, I respect where he is coming from and his assessment of the business largely agrees with my own.

On July 20th, 2016, Stifel Nicolaus downgraded Disney to a 'Hold,' pointing to a split story, pointing on the one hand to a strong studio business and related consumer products business, and on the other hand to a media business which has a 'likely flat year' in F2017 to look forward to.

Bizarrely, however, Stifel Nicolaus also said that Disney stock was presently fully valued, while also maintaining a target price of $110, which, as SA Editor Jason Aycock noted, would provide a 10.6% upside from its $99.47 closing price on July 19th.

At present, Disney is trading in the $98-99 range with a price-to-earnings ratio of 18.31 and a forward price-to-earnings ratio of 16.13, offering a dividend yield of 1.43% and sustained by a low payout ratio of 25.05%. The dividend growth rate over the past five years was 35.25%, which makes up for the low dividend yield - and that dividend yield, combined with the low payout ratio, ensures that the likelihood of a dividend cut is equally low.

Earnings per share over the past twelve months for Disney was $5.43, and the EPS growth rate over the next five years is estimated to be 10.01%, and increasing to 12.5% thereafter. Using a discount rate of 17.14%, which is the required rate of return on Disney's common stock, I calculate fair value for Disney's stock at $118.75 per share. The stock is undervalued by 17% at this time.

Furthermore, Morningstar show that Disney's average five year P/E ratio is 19.3, which is above its current P/E ratio, indicating that the stock is currently undervalued. And it is trading at the lower end of its 52 week range of $86.25-$122.08. These factors lead me to believe that Disney is being offered at a good price, which is rare to find in the current stock market.

So, with respect, I can only conclude that Disney is currently undervalued relative to its actual worth. The key reason for investing in Disney - its gargantuan intellectual property portfolio which makes it unassailable within the entertainment field - remains true, and will likely continue to be true for many decades to come. Investors wishing to avail of the profits that will accrue as a result will do well at present, I believe.

DISCLAIMER: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited here are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching potential investments.

Disclosure: I am/we are long DIS.

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.