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The Walt Disney Company: cash flow valuation

|Includes:The Walt Disney Company (DIS)
Current Price: ~ $38/share
Projected Yield: ~ 1.55%




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.     


I estimated the firm's WACC today at 11.81% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:
Year
FCF $Millions
2002
1200
2003
1852
2004
3217
2005
2446
2006
4759
2007
3855
2008
3860
2009
3311
2010
4468
2011
3435

Average Annual Growth FCF: ~ 20%
CAGR FCF: ~ 12%
Consensus Forecast Industry 5-Year Growth: ~ 19% per year
Consensus Forecast Company 5-Year Growth: ~ 14% per year
Internal Growth Rate: ~ 7%
Sustainable Growth Rate: ~12%

Scenario 1
Starting at $3435 million FCF, assuming the company achieves a 5-year growth rate in FCF of 14% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
3435
1
3916
2
4464
3
5089
4
5802
5
6614
Terminal Value
63842

The firm's future cash flows, discounted at a WACC of 11.81%, give a present value for the entire firm (Debt + Equity) of $54745 million. If the firm's fair value of debt is estimated at $15800 million, then the fair value of the firm's equity could be $38945 million.  $38945 million / 1800 million outstanding shares is approximately $22 per share and a 20% margin of safety is $17/share.


Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 14% per year, then growth in FCF of 5.50% per year forever: :

Discounted Cash Flow Valuation
Year
FCF $Millions
0
3435
1
3916
2
4464
3
5089
4
5802
5
6614
Terminal Value
119487

The firm's future cash flows, discounted at a WACC of 11.81%, give a present value for the entire firm (Debt + Equity) of $86589 million. If the firm's fair value of debt is estimated at $15800 million, then the fair value of the firm's equity could be $70789 million.  $70789 million / 1800 million outstanding shares is approximately $39 per share and a 20% margin of safety is $31/share.


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