BUSINESS
The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. It operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences and Products. The company engages in the film and episodic television content production and distribution activities, as well as operates television networks under the ABC, Disney, ESPN, Freeform, FX, Fox, National Geographic, and Star brands; and studios that produces films under the Walt Disney Pictures, Twentieth Century Studios, Marvel, Lucasfilm, Pixar, and Searchlight Pictures banners.
INVESTMENT RATING
With future capital returns forecasted to exceed the cost of capital, DIS is expected to continue to be an important Value Builder.
Walt Disney has a current Value Trend Rating of B (Positive).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Walt Disney has a neutral Appreciation Score of 53 but a very high Power Rating of 86, leading to the Positive Value Trend Rating.
Walt Disney’s stock is selling well below targeted value. The current stock price of $118.38 compares to targeted value 12 months forward of $199.
This neutral appreciation potential results in an appreciation score of 53 (47% of the universe has greater appreciation potential.)
Walt Disney has a Power Rating of 86. (This very high Power Rating indicates that DIS has a better chance of achieving attractive investment performance over the near to intermediate term than all but 14% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; and the recent trend in DIS’ earnings estimates has been favorable. An offsetting factor is the Diversified Multi-Media comparison group is currently in an unfavorable position.
INVESTMENT PROFILE
DIS’ financial strength is average. Financial strength rating is 49.
Relative to the S&P 500 Composite, Walt Disney Co has slightly more Value than Growth characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that DIS is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, low historical growth, and high earnings variability. DIS’ valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. DIS has unusually high market capitalization.
CURRENT SIGNALS
Walt Disney’s current operations are eroding. Return on equity is falling, reflecting: and falling tax keep rate.
Walt Disney’s current technical position is very strong. The stock price is in a 5.1 month up move. The stock has appreciated 54.2% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
Marginal positive changes in The Walt Disney Co (NYSE: DIS) fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated B.
The Walt Disney Co (NYSE: DIS) stock closed at $118.38 on 4/5/24 after an increase of 1.1%. However, below average trading volume at 75% of normal accompanied the advance. The stock has declined -2.1% during the last week but has been exceptionally strong relative to the market over the last nine months.
CASH FLOW
In 2023, Walt Disney generated a significant increase in cash of +$2,564 million (+22%). Sources of cash were larger than uses. Cash generated from 2023 EBITDA totaled +$14,361 million. Non-operating uses consumed -$2,921 million (-20% of EBITDA). Cash taxes consumed -$2,484 million (-17% of EBITDA). Re-investment in the business amounted to -$4,382 million (-31% of EBITDA). On a net basis, debt investors withdrew -$3,925 million (-27% of EBITDA) while equity investors furnished +$1,915 million (+13% of EBITDA).
Walt Disney’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Walt Disney Peer Group. (Since 2021 Non-operating Income, %EBITDA has accelerated sharply.) In most years, Walt Disney was in the top quartile and lower quartile. Currently, Walt Disney is lower quartile at -20% of EBITDA (-$2,921 million).
Walt Disney’s Cash Taxes, %EBITDA enjoyed a strong overall uptrend over the period. This improvement was accompanied by stability for the Walt Disney Peer Group. (Since 2021 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Walt Disney was in the top quartile and lower quartile. Currently, Walt Disney is below median at -17% of EBITDA (-$2,484 million).
Walt Disney’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Walt Disney Peer Group. (Since 2021 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Walt Disney was in the second quartile and lower quartile. Currently, Walt Disney is substantially above median at -31% of EBITDA (-$4,382 million).
Walt Disney’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Walt Disney Peer Group. (Since 2021 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Walt Disney was in the lower quartile and top quartile. Currently, Walt Disney is lower quartile at -27% of EBITDA (-$3,925 million).
Walt Disney’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Walt Disney Peer Group. (Since 2021 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, Walt Disney was in the top quartile and third quartile. Currently, Walt Disney is upper quartile at +13% of EBITDA (+$1,915 million).
Walt Disney’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Walt Disney Peer Group. In most years, Walt Disney was in the third quartile and top quartile. Currently, Walt Disney is upper quartile at +18% of EBITDA (+$2,564 million).
Walt Disney’s Cash, %Revenue has exhibited a minor overall uptrend over the period. This improvement was accompanied by an opposite trend for the Walt Disney Peer Group. (Since 2020 Cash, %Revenue has experienced a very sharp decline.) In most years, Walt Disney was in the lower quartile and third quartile. Currently, Walt Disney is below median at +16%.
PROFITABILITY
Walt Disney’s return on equity has eroded very significantly since 2014. The current level is 3.0% versus the high of 16.7% and the low of -3.4%.
This very significant erosion was due to very strong negative trend in pretax operating return and little change in non-operating factors.
The productivity of Walt Disney’s assets declined over the full period 2014-2023: asset turnover has suffered a very strong overall downtrend but it experienced a very sharp recovery after the 2020 low.
Reinforcing this trend, pretax margin experienced a strong overall downtrend even as it experienced a very sharp recovery after the 2023 low.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
Walt Disney’s return on equity is lower quartile (3.0%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is lower quartile (3.0%) reflecting asset turnover that is below median (0.45X) and lower quartile pretax margin (6.6%).
Tax “keep” rate (income tax management) is lower quartile (50.9%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is below median (1.96X).
GROWTH RATES
Overall, Walt Disney’s growth rate has slowed very considerably in recent years.
Walt Disney’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 4.9% per year.
Total asset growth has been 10.2% per year. (More recently it has been 0.2%.)
Annual E.P.S. growth has been -11.0% per year.
Equity growth has been 9.6% per year. (More recently it has been 3.3%.)
Walt Disney’s consensus growth rate forecast (average of Wall Street analysts) is 16.2% — substantially above the average of the historical growth measures.
Relative to the Walt Disney Peer Group, Walt Disney’s historical growth measures are erratic. Equity growth (9.6%) has been above median. Total asset growth (10.2%) has been at median. Revenue growth (4.9%) has been at the lower quartile. E.P.S. growth (-11.0%) has been lower quartile.
Consensus growth forecast (16.2%) is slightly above median.
PRICE HISTORY
Over the full time period, Walt Disney’s stock price performance has been below market. Between June, 2013 and April, 2024, Walt Disney’s stock price rose +87%; relative to the market, this was a -42% loss. Significant price move during the period: 1) February, 2021 – December, 2022: -54%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 12.4% is slightly above median relative to the S&P 500 Composite.
In addition to being slightly above median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 12.4% is lower quartile relative to Walt Disney Co (The) Peer Group.
Current 5-year total return performance of 0.1% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of 0.1% relative to S&P 500 Composite, Walt Disney’s total return performance is lower quartile relative to Walt Disney Co (The) Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, DIS’ overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. Ratio of enterprise value/assets is below median. Ratio of enterprise value/revenue is below median. The lowest factor, the price/equity ratio, is near the lower quartile.
Relative to Walt Disney Peer Group, DIS’ overall valuation is low. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is slightly below median. Ratio of enterprise value/revenue is lower quartile. Ratio of enterprise value/assets is at the lower quartile. The lowest factor, the price/equity ratio, is at the lower quartile.
Walt Disney has a major value gap compared to the median. For DIS to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.98X to 5.65X. If DIS’ ratio of enterprise value/revenue were to rise to 5.65X, its stock price would be higher by $130 to $248.
For DIS to achieve upper quartile valuation relative to the Walt Disney Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.98X to 10.84X. If DIS’ ratio of enterprise value/revenue were to rise to 10.84X, its stock price would increase by $381 from the current level of $118.
VALUE TARGETS
With future capital returns forecasted to exceed the cost of capital, DIS is expected to continue to be an important Value Builder.
Walt Disney’s current Price Target of $167 represents a +41% change from the current price of $118.38.
This neutral appreciation potential results in an appreciation score of 53 (47% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 53, the high Power Rating of 86 results in an Value Trend Rating of B.
Walt Disney’s current Price Target is $167 (-39% from the 2023 Target of $275 but +41% from the 04/05/24 price of $118.38). This dramatic fall in the Target is the result of a -2% decrease in the equity base and a -38% decrease in the price/equity multiple. The forecasted decline in growth has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very large negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 10.1% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2015 and 2023. The current forecast is significantly below the 2017 peak of 21%.
PTR’s growth forecast is 0.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is significantly below the 2020 peak of 19%.
PTR’s cost of equity forecast is 3.5% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2015 and 2023. The current forecast is well below the 2018 peak of 11.0%.
At Walt Disney’s current price of $118.38, investors are placing a positive value of $27 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 7.0% versus a cost of equity of 2.5%.
PTR’s 2025 Price Target of $167 is based on these forecasts and reflects an estimated value of existing assets of $187 and a value of future investments of $-20.
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