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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • The Walt Disney Co: Cash Flow Valuation Update 0 comments
    Dec 17, 2012 5:09 PM | about stocks: DIS

    Current Price: ~ $49/share
    Yield: ~ 1.54%

    Disney owns the rights to some of the most famous characters ever created, including Mickey Mouse and Winnie the Pooh. These characters and others are featured in several theme parks Disney owns or licenses around the world. Disney makes live-action and animated films under several labels and owns ABC, Disney Channel, and ESPN. Disney also owns a 42.5% stake in A&E, The History Channel, and Lifetime Networks. The company generates about 25% of its sales from outside the United States.

    Estimated WACC for the firm today is 10.70% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    YearFCF $Millions
    20031852
    20043217
    20052446
    20064759
    20073855
    20083860
    20093311
    20104468
    20113435
    20124182

    (click to enlarge)

    Average Annual Growth FCF: ~ 16%

    CAGR FCF: ~ 9%
    Consensus Forecast Industry 5-Year Growth: ~ 18% per year

    Consensus Forecast Company 5-Year Growth: ~ 11% per year

    Internal Growth Rate: ~ 7%

    Sustainable Growth Rate: ~ 14%

    Scenario 1
    Average FCF (2012, 2011, 2010) is $4028 million

    • Start at $4028 million FCF
    • Assume a 5-year growth rate in FCF of 11% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    04028
    14471
    24963
    35509
    46115
    56787
    Terminal Value70392

    The firm's future free cash flows, discounted at a WACC of 10.70%, give a present value for the entire firm (Debt + Equity) of $62640 million. If the firm's fair value of debt is estimated at $15146 million, then the fair value of the firm's equity could be $47494 million. $47494 million / 1770 million outstanding shares is approximately $27 per share and a 20% margin of safety is $22/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 11% per year, then 5.25% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    YearFCF $Millions
    04028
    14471
    24963
    35509
    46115
    56787
    Terminal Value138163
    • Present Value of the entire firm (Debt + Equity): $103402 million
    • Value of Equity: $88256 million or $50/share
    • 20% margin of safety is $40/share

    Sources

    Morningstar.com

    Yahoo! Finance

    The Walt Disney Company

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

    Stocks: DIS
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