The Walt Disney Co: Cash Flow Valuation Update

Dec. 17, 2012 5:09 PM ETDIS
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Value, Long/Short Equity

Contributor Since 2011

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 experience as a SBA lender. B.A. Applied Mathematics, M.B.A. Business Administration. Presently seeking a position in finance. cota.eric@gmail.com

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:

Year FCF $Millions
2003 1852
2004 3217
2005 2446
2006 4759
2007 3855
2008 3860
2009 3311
2010 4468
2011 3435
2012 4182

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

Year FCF $Millions
0 4028
1 4471
2 4963
3 5509
4 6115
5 6787
Terminal Value 70392

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

Year FCF $Millions
0 4028
1 4471
2 4963
3 5509
4 6115
5 6787
Terminal Value 138163
  • 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.

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