Valuation: Walt Disney Company (DIS)

 Company Profile:  Walt Disney Company (DIS) (obtained via Google Finance)

The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company. The Company operates in four segments: Media Networks, which includes a domestic broadcast television network, domestic television stations, cable/satellite networks and international broadcast operations, television production and distribution, domestic broadcast radio networks and stations, and Internet and mobile operations; Parks and Resorts, which generates revenues from the sale of admissions to the theme parks, room nights at the hotels, and rentals at the resort properties; Studio Entertainment, which produces and acquires live-action and animated motion pictures, direct-to-video programming, musical recordings and live-stage plays, and Consumer Products, which partners with licensees, manufacturers, publishers and retailers to design, promote and sell products based on Disney characters and other intellectual property. In May 2006, it acquired Pixar Animation Studios.

Business and Management Review

1) Is the business simple and understandable?

At the simplest level, Disney is in the entertainment business.  This business includes operations in movies, television, products, and theme parks, among other things.  The entertainment business can be simple and understandable to the majority of investors.

2) Does the business have a consistent operating history?

Disney has been consistently operating in the entertainment business since Walt Disney formed the cartoon studio in the 1920s.  For the most part the company has not wavered from this initial operating strategy.

3) Does the business have favorable long term prospects?

It seems to me that Disney will remain solvent for years to come at the very least.  Above that, the company does seem to have favorable prospects as the brand name is extremely strong and provided management does well in the future, the company will remain strong as well.  In other words, kids will continue to love Disney characters and want to go to Disneyworld.  As long as the management can keep from killing the company, it should do reasonably well.

4) Is management rational?

A lot of people had mixed feelings about Michael Eisner.  Now that he has been replaced by Bob Iger, the sentiment towards management has improved again and the performance of the company seems to be benefiting from the change.  Having been in the position of CEO since 2005, the earnings in many segments have improved under Iger’s leadership. 

5) Is management candid with its shareholders?

The company’s investor relations page is much more in depth than most, and we enjoyed perusing the in depth history about Disney and reading about the Disney Legends.  Of course, all the business information was interesting too.

6) Does management resist the institutional imperative?

We find no reason to believe the management is following the institutional imperative.

Financial and Value Review

Defensive:

1) Size of firm

The market cap of Disney is $63.14 billion.  Pass.

2) Strong financial condition

The company’s current ratio is about 1, far below the 2.0 requirement.  Fail.

3) Earnings stability

The company has had a consistently positive net income for over 10 years.  Pass.

4) Dividend record

Disney has consistently paid a dividend for over 10 years.  Pass.

5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  Pass.

6) Price to earnings analysis

With a ModernGraham PE ratio (using our Methods) of 20.1, the requirement of under 20 is met if the price falls a little bit more.   We’ll be lenient and let it Pass.

7) Price to assets analysis

The ModernGraham Price to Book ratio for Disney is about 2.15, below our 2.5 limit.  The multiple of PE to PB is below our requirement of 50.  Pass.

Overall

Having passed 6 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe Disney may be suitable for the defensive investor.

Enterprising:

1) Strong financial condition

The company’s current ratio is below 1.5 and debt to net current assets is not below than 1.1.  Fail.

2) Earnings stability

The company has achieved a consistently positive net income for over 5 years.  Pass.

3) Dividend record

The company currently pays a dividend.  Pass.

4) Earnings growth

Earnings are greater today than they were 5 years ago.  Pass.

5) Price

The price is not less than 150% of the net tangible assets.  Fail.

Overall

Though the company has only passed 3 of the 5 tests for the enterprising investor, since we found it may be suitable for the defensive investor, it would not make sense to say that the investor who can take on more risk due to having the time to do more research would not take the company.  Therefore, it also may be suitable for the enterprising investor.

Valuation:

Our valuation model finds a fair value to be around $35. 

Opinion:

Since the company is currently trading at about $32, we feel it is currently fairly valued.  If the price continues to dip due to market fluctuations, it may be a suitable investment pending further research by the investor.

Ben’s wife held a miniscule position (single share) in Disney at the time of publication.  Also, please read our disclaimer and Our Methods.