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Disney: 3 Different Valuation Approaches Signal It's Time To Buy

Robert Riesen profile picture
Robert Riesen


  • Mixed revenue results in 2017 have been a major factor in Disney's lackluster stock performance over the last year.
  • Disney's Trailing P/E of 14.59x is 28% less than its 5-year average of 20.2x.
  • Disney has a growing dividend that's supported by strong free cash flow.
  • Wall Street expects 18% upside potential in the stock.
  • The 21st Century Fox deal gives Disney a real chance to compete with Netflix.

Disney (NYSE:DIS) struggled during 2017, but a recent slump in the stock price puts the company into deep buy territory. My opinion is based on multiple valuation approaches all signalling the stock is on sale:

  1. Disney trades at steep discounts relative to its 5-year averages across multiple valuation metrics.
  2. Disney trades at a 30% EV/FCF discount relative to peers.
  3. A conservative single-stage discounted cash flow model shows 15% upside potential.

Disney's Financial Snapshot

2017 was a mixed-bag for Disney and is one of the main reasons the stock price has been slumping in my opinion. Almost all major operating metrics were down year over year. This was a result of decreasing performance at Disney's Media Networks, Studio Entertainment and Consumer Products & Interactive Media divisions, which was partially offset by growth in its Parks & Resorts division. According to Disney:

The decrease at Media Networks was due to contractual rate increases for sports programming, lower advertising revenue and higher losses from our equity investments in BAMTech LLC (BAMTech) and Hulu LLC (Hulu), partially offset by higher affiliate revenue. Lower Studio Entertainment and Consumer Products & Interactive Media results were due to the exceptional performance of the Star Wars franchise in the prior year, which benefited all of our key distribution channels.'

One of Disney's major weaknesses is its balance sheet. Both net cash position and current ratio have trended in the wrong direction the last couple of years. The primary driver of this was an aggressive stock repurchase program, which amounted to $28.2 billion in net cash spent from 2014 through 2017. I am a fan of stock repurchases, especially when the stock is undervalued, but I'd really like to see Disney focus on lowering debt in the future since interest rates could be on the rise and Disney will also be assuming an additional $13.7 billion

ChartDIS PE Ratio (TTM) data by YCharts

This article was written by

Robert Riesen profile picture
I'm an avid investor, managing my own portfolio. Im also a previous Series 7 License holder and currently studying for the CFA Level II exam. Previous financial experience includes 5 years at Square 1 Bank, a commercial bank specializing in venture lending to entrepreneurs and venture capitalists: - Assistant Vice President – Life Sciences & Technology Banking - Life Sciences Client Manager - Senior Portfolio Analyst - Portfolio Analyst

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

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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