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Margin of Safety Investing
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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a... More
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  • Disney (DIS) Quick Review: Low return and not a great price! 0 comments
    Sep 26, 2010 9:36 PM | about stocks: DIS

    Intro

    Disney is currently trading at $34.3. It came into my ideas pipeline on the basis of an investor interview of Francois Rochon of Giverny Capital in the Value Investor Insight published at the end of August.

      

    1- Business Performance Risk

    Metric

    Status

    FCF / Sales

    Last Twelve Months (“LTM”): 10.3%, in line with performance over the last 10 years of between 7% and 14% (excluding 2001/02 with 5%).

    ROE

    LTM:11.1%. Historically has been between -1%(!) and 15% with an average in the single digits

    ROA

    LTM:6.2%, in line with historical ranges between 0% and 8%

    Revenue Growth

    Revenue growth has been consistent around 4% on a 10 years basis. however growth tend to be volatile with flat years followed by jumps of 8-10%

    Cash distribution to shareholders

    Disney’s dividend yield is currently a low 1.0%, representing a payout ratio of ~15%.  The company has been buying back a few shares back with only 5% share repurchases in total over the last 5 years

    Overall I am not thrilled by DIS’ performance, with low ROE/ROA a growth which I found surprisingly low given the strength of the brand. In addition cash distributions to investors are very low and could point to a lack of discipline of management in its uses of cash

     

    2- Balance Sheet Risk

    Metric

    Status

    LT Debt / Equity

    LTM: 0.3x. This ratio has been improving over the last 8 years or so.

    Current Ratio

    1.3x, on the high side compared to DIS (aggressive) historical average of around 1.0x

    While Disney has little debt it seems that the company is aggressive in its management of liquidity.

     

    3- Valuation Risk

    Metric

    Status

    Cash Return

    6.1%

    P/E

    16.4x, above the S&P500 and in line with DIS 5 year average of 16.1x

    While Disney does not have a rich valuation it is not cheap either!  The company trades at a robust 16.0 P/E which given its low historical growth could prove expensive. In addition the company’s cash return of 6.1% is reasonable but would probably not leave an investor with a sufficient margin of safety to invest.

     

    Conclusion

    I will pass on Disney for now. The business performance is not as solid as I expected of the company with very disappointing ROE/ROA’s, leading to low cash distribution to shareholders as management needs to keep the cash to finance it low growth! In addition, the company’s valuation while not outrageous is probably high enough that an investor could not invest with a reasonable margin of safety.



    Disclosure: No position
    Stocks: DIS
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