The Walt Disney Company: Post-Earnings Valuation

Source: Reuters

The Walt Disney Company (NYSE:DIS) reported better-than-expected earnings for 3 out of 5 earnings. It last posted its earnings for Q2 2017 on May 9th. The company reported EPS of $1.50 for the quarter, topping Street estimates of $1.41 by $0.09. The company had revenue of $13.33 billion for the quarter, compared to the Street estimate of $13.45 billion. During the same quarter in the prior year, the company posted EPS of $1.36. Currently, analysts expect DIS to generate revenue of $14.71 billion and EPS of $1.63 in Q3 2017. DIS has a 12-month low of $90.32 and a 12-month high of $116.10 (CMP $109.67). The firm’s market cap is $171.48 billion.

“Disney delivered another quarter of double-digit EPS growth, driven by the strong performance of our Studio and Parks and Resorts,” said Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney Company. “Our continued strong performance is a direct result of our proven strategic focus on great branded content, innovative technology and global growth. We’re pleased with our results in Q2 and remain confident in our ability to continue to deliver significant shareholder value over the long term.”


Consensus Estimates Analysis

Source: Reuters

The company had revenue of $55.63 billion for the FY2016 (up 6% YoY). Currently, analysts expect DIS to generate revenue of $56.80 billion (up 2% YoY) in fiscal 2017 and $60.34 billion (up 6% YoY) in fiscal 2018.

Analysts are expecting DIS to post EPS of $5.96 in 2017. This implies a 2017 forward P/E for shares at 18.4x and PEG ratio of 2.5. Analysts are currently expecting 2018 EPS of $6.78, which implies a 2018 forward P/E for shares at 16.1x. This is below the S&P 500 forward P/E of 19.7x.

Peers And GPRV Analysis

Source: infinancials

YTD (year-to-date), the stock has outperformed its peers (peers median return -0.4%) and has earned a return of 5%. During the same period, the Viacom Inc. (NYSE:VIA) (NASDAQ:VIAB), Twenty First Century (NASDAQ:FOX) (NASDAQ:FOXA) and CBS Corporation (NYSE:CBS) earned a negative return.

Growth-Profitability-Risk-Value (GPRV Analysis)

*DIS – Green shaded section

*International Peers – Blue line

*NTM – Next Twelve Months

Source: Infinancials

Growth: Based on above GPRV analysis, we can conclude that peers have better EPS and sales growth estimates and DIS has better historical sales and net income growth. Profitability: DIS has high profitability (EBIT margin, ROCE, ROE) compared to peers. Risk: Based on above GPRV analysis, we can conclude that DIS has high risk compared to peers. Value: Based on Price/Cash Flow, Price/Book, Forward EV/Sales, EV/EBITDA, EV/EBIT and P/E ratio, we can conclude that DIS is trading at discount/undervalued compared to peers.

Performance Analysis by Segment

Source: Company Fillings

1. Media Networks: Media networks (ESPN and all the other television networks) contributed 45% of total revenue in Q2 2017. On a year-over-year basis (YoY), revenue and operating income were up 3% and down 3%, respectively. Disney is stuck a little bit here because of fewer subscribers, lower advertising rates and higher programming costs. However, management has positive outlook on its new corporate direction.

Disney CEO Robert A. Iger commented:

“The strength of the brand and consumer demand makes ESPN extremely attractive to new platforms and services entering the market which has led to ESPN content being featured on a growing array of over-the-top services, including Sling TV, Hulu, PlayStation Vue, DIRECTV and YouTube TV. Consumer response to these offerings is very encouraging. The substantial growth we’re already seeing makes us bullish on the future of these nascent offerings. Right now, they are a small part of the pay TV universe, but we believe they’ll be a much bigger part of the business going forward. And from a per sub pricing standpoint, these new services are just as valuable to us as traditional platforms.”

2. Parks & Resorts: Parks & Resorts contributed 32% of total revenue and was the best performer in the quarter. Revenue here increased by 9% YoY (driven by growth in its domestic and international businesses) and operating income by 20% YoY.

3. Studio Entertainment: Studio Entertainment contributed 15% of total revenue. Revenue here fell by 1% YoY and operating income was up by 21% YoY. Some of the major properties licensed by the company include: Star Wars, Mickey and Minnie, Frozen, Avengers, Disney Princess, Disney Channel characters, Spider-Man, Cars, Finding Dory/Finding Nemo, Winnie the Pooh and Disney Classics.

4. Consumer Products & Interactive Media: This segment contributed 8% of total revenue. Revenue fell by 11% YoY and operating income was up by 3% YoY.

Income Statement Analysis

Source: Morningstar

The company had revenue of $13.33 billion (up 3% YoY) for the quarter compared to Q2 2016 revenue of $12.96 billion.

Segment operating margin was 28.12% for Q2 2017, up 219 basis points over Q2 2016. This was primarily driven by a decrease in SG&A, partially offset by an increase in other operating expenses. During the same period, interest expense has increased from 0.62% to 0.86% (% revenue). Also, net income margin improved from 16.52% to 17.91% (139 bps improvement).

Source: Morningstar

DIS has strong operating cash flow and FCF. In TTM, operating cash flow was $11.92 billion and free cash flow was $7.7 billion (FCF per share $4.71).

Return on Invested Capital

ROIC (return on invested capital) is an important metric that shows how effectively a company makes use of its capital.

Source : Morningstar

Disney’s 15.26% ROIC is higher than any of the other large media conglomerates, including Time Warner (NYSE:TWX), CBS Corporation and Twenty-First Century Fox. In addition, its ROIC is higher than its WACC (weighted average cost of capital) or positive economic earnings.

Piotroski F Score – An accounting based scoring system to check the fundamental quality of a stock.

The Piotroski score is a simple nine-point scoring system to determine the fundamental strength of the company. By focusing on the accounting, it looks at the business performance to determine the winners from the losers. Performance of this model improves when it is combined with stocks with low price to book values. The higher the score the better. The score ranges can be interpreted as follows: 1-4 is a bad score. 5-6 is acceptable. 7-9 is great.

DCF Analysis

We used the DCF analysis over a five-year period with the following assumptions:

Revenue was projected to be in line with the Street’s expectations. Currently, analysts expect Disney to generate revenue of $56.80 billion in fiscal 2017 and $60.34 billion in fiscal 2018. Operating margin was in line with historical levels (Operating Margin – 5-Year Average 23.24%). The company’s fiscal 2017 tax rate was in line with historical levels (Operating Margin – 5-Year Average 34%). D&A, capex and changes in WC were projected to be in line with historical levels. We used a baseline rate of 9% for WACC and a baseline terminal FCF growth rate of 3%.

Here’s the DCF analysis down to the unlevered FCF:

Disney’s implied share price is $127, which is a 16% premium to the current price of $109. The most likely implied value is between $95 and $155 per share based on this analysis.

Market View – Positive

Source : Nasdaq

Analysts’ recommendations show a 12-month targeted price of $122 per share. Of the analysts covering Disney, 11 recommended it as a “Strong Buy”, 8 recommended it as a “Buy & Hold” and one recommended it as a “Sell.”

My Recommendation – Buy Rating

I will recommend a Buy rating for Disney based on the following factors:

Disney is trading at discount compared to peers based on GPRV analysis. Based on DCF analysis, Disney’s implied share price is $127, which is a 16% premium to the current price of $109. The most likely implied value is between $95 and $155 per share. Disney’s 15.26% ROIC is higher than any of the other large media conglomerates. Acceptable Piotroski score. Market view is positive.

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.

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