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Disney (DIS) Quick Review: Low return and not a great price!

|Includes:The Walt Disney Company (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