Disney Intrinsic Value Analysis (DIS) - FREE SAMPLE
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This intrinsic value calculation uses data most recently updated on April 10th, 2019. I completed the calculation on April 26th, 2019.
Disney Intrinsic Value Calculation – Initial Estimate
Disney’s Intrinsic Value will be calculated using a discounted cash flow analysis. I will, therefore, outline my assumptions for the earning power of Disney’s business, the discount rate I will use, and the growth rate I expect for Disney over the long-term.
Estimating Disney’s Earnings Power using Net Income
Disney earned $7.08 in 2018.
Analyst Estimates for 2019 and 2020 are lower than $7.08.
However, let’s assume for a minute that $7.08 in Net Income represents Disney’s earnings power.
I will use a “Real” Discount Rate of 6.5%
Disney is a company that should be able to grow earnings at a rate that at least matches or exceeds inflation. Disney is a mature business. They won’t grow quickly. If they do, growth won’t be durable. However, they have the ability to grow over time. They have clear and durable pricing power due to their entertainment brands. There is only one Disney.
I will, therefore, use a “real” discount rate to analyze Disney of 6.5%. My nominal discount rate is 10%, so this embeds an assumption of 3.5% inflation.
The Walt Disney Company growth rate should exceed population growth by a small amount
I will assume that Disney can grow its earnings at a real 1% rate. That is, at a rate that exceeds inflation by 1%. US population growth hasn’t been 1% since 2001 (currently 0.62% from 2017-2018. Therefore, I am assuming that Disney is growing its earnings through both population growth and productivity growth.
I believe this is a reasonable assumption, and when combined with my inflation assumption of 3.5%, I am estimating a 4.5% nominal growth rate for Disney in perpetuity.
Discounted Cash Flow Calculation: Disney
A basic discounted cash flow formula can be used to complete the calculation because we assumed that Disney was already a mature business.
Basic DCF Formula:
Intrinsic Value = Earnings/(Discount Rate – Growth) = $7.08/(6.5% – 1%) = $128.73
The result is an intrinsic value of $128.73 for Disney shares.
Discussion of Disney’s Intrinsic Value and related assumptions
I believe this is a high-end estimate because the $7.08 in earnings power is possibly overstating the long-term earnings power of Disney. In prior years, earnings have not exceeded $6.00 per share. In addition, the acquisition of Fox has resulted in a dilution effect on Disney’s per-share earnings. At least temporarily, Disney’s earnings will drop. It is possible that they will quickly begin growing again in year 2 or 3, but it does mean that I am hesitant to consider using a number higher than $7.08 for the earning power of Disney.
I am not adjusting Disney’s net income to reach the owner’s earnings for the following reason: I don’t believe that Disney has the owner’s earnings that exceed net income.
Reference Spreadsheet and analysis of Depreciation and Amortization
Free-Cash-Flow has historically approximated Net Income, but cash actually returned to shareholders has been approximately 88% of Net Income.
While Disney’s capital expenditures exceed depreciation, I am going to assume that maintenance capital expenditures at least match or exceed the depreciation charge, because depreciation has been growing over time.
This growth in depreciation is due to growth in Disney’s assets but also likely due to wear and tear and the need to spend more due to inflation. Disney operates somewhat capital intensive parks, resorts, and cruise lines. These assets require ongoing maintenance capital. While this is true, I also think that Disney’s owner’s earnings are a high percentage of their net income. This is proven out by their large and consistent spending on dividends and share repurchases over time. (Over the last 7 years, Disney has returned about 87-90% of its Net income to shareholders in the form of Dividends and Share Buybacks)
As always, do your own due diligence and make your own judgment about what reasonable assumptions might be for Disney’s business.
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NOTE: This intrinsic value report is being provided as a free sample to free subscribers of the type of analysis available exclusively for the paid membership.
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