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Federico Flom
Federico Flom
Articles (110) 

The Walt Disney Company (DIS) - A Discount to Historical Valuations

November 21, 2011 | About:

The Walt Disney Company (NYSE:DIS) is a company with a collection of valuable assets where media networks represent the backbone of its conglomerate as they generate more than 50% of its operating profit.

In terms of the media network, Disney has ESPN, which contributes with 75% of cable network sales and dominates sports television with its 24-hour programming.

Although it has used money to meet the costs of programming for pay-TV subscribers and more than $1 billion per year for the NFL (the football league), ESPN has no competitor to fear. Indeed, it would be very difficult for another company to live up to ESPN contracts. It has posted a record number of viewers and is the leading destination for sports.

Another source of income for Disney, as regards media networks, is Disney Channel. This No. 1 channel for kids and teenagers enjoys a strong position and the only competition comes from Nickelodeon. The Disney Channel has generated a hit with Hannah Montana, a TV program that has increased its revenue, thanks to the films, music and TV shows.

Furthermore, management has announced that they will launch the Disney Channel in Russia, thus reaching millions of households with original Russian content.

What about the Disney brand? It is the remaining part of the empire. Disney has been able to monetize its characters and franchises through movies, home video sales, merchandising and the theme parks. It has no parallel in the industry. Its parks and resorts cannot be replicated. No comparison can be made to such enduring quality family entertainment.

Apart from the parks Disney has in the U.S. and Europe, the company is working on a new resort in China that apparently will include two themed hotels and large dining and entertainment venues.

In terms of figures, Disney reported strong results. And what has definitely caught my attention is that shares are trading cheap, below $44 of my fair value estimate.

It is worth buying a position in it. But the share price is not the only positive item in the company. Fortunately revenue and the operating profit have been 7% and 23% higher respectively than the prior period driven by cable networks and parks business improved results.

As regards cable networks in particular, sales have risen 12% thanks to ESPN and Disney Channel. Anyway, parks and resorts are contributing to this scenario with an 11% growth. Indeed, they are generating strong returns on capital as well as strengthening and growing their product in markets where Disney already operates.

More importantly, profitability has increased from 11.2% to 13.5%. Although costs will undoubtedly increase with the new cruise ship, it will soon be profitable.

Is Disney a top-quality stock worth investing or is it not? I know many of you are disappointed by the high expenditure levels, but these expenditures will surely represent profitable investments in the long term.

The company is currently selling at an 11.6x P/E. I find it compelling, considering it is below the 15x five-year historical valuation range.

As we can see in the chart below, DIS is trading at a discount over entertainment peers and over DIS forward P/E Ratio.



Disney is doing great both financially and strategically. They have delivered strong operating results; they have expanded margins and are permanently investing to extend their brands outside the U.S. It is a very well-positioned firm that will generate large revenues and returns in the years to come.

About the author:

Federico Flom
Equity Research Analyst

Rating: 3.2/5 (9 votes)


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