ModernGraham Valuation: The Walt Disney Company (DIS)

 

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Company Profile (obtained from Google Finance): The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company. The Company operates in five business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive. The Company has a 51% effective ownership interest in Disneyland Paris, a 5,510-acre development located in Marne-la-Vallee, approximately 20 miles east of Paris, France. The Company manages and has a 40% equity interest in Euro Disney S.C.A. The Company owns a 48% interest in Hong Kong Disneyland Resort through Hongkong International Theme Parks Limited. On November 7, 2012, the Company sold its 50% interest in ESPN STAR Sports (ESS). On November 7, 2012, the Company sold its 50% equity interest in ESPN STAR Sports (ESS). On December 21, 2012, the Company acquired Lucasfilm Ltd. LLC.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Calculator)

Key Data:

MG Value $71.18
MG Opinion Fairly Valued
Value Based on 3% Growth $43.59
Value Based on 0% Growth $25.55
Market Implied Growth Rate 7.31%
NCAV -$12.68
PEmg 23.12
Current Ratio 1.25
PB Ratio 2.87

Balance Sheet – 6/30/2013 

Current Assets $14,205,000,000
Current Liabilities $11,341,000,000
Total Debt $12,784,000,000
Total Assets $80,565,000,000
Intangible Assets $34,772,000,000
Total Liabilities $37,029,000,000
Outstanding Shares 1,800,000,000

Earnings Per Share – Diluted

2013 $3.38
2012 $3.40
2011 $2.75
2010 $2.21
2009 $1.92
2008 $2.28
2007 $2.24
2006 $1.63
2005 $1.24
2004 $1.12
2003 $0.65
2002 $0.60

Earnings Per Share – Modern Graham

2013 $3.01
2012 $2.72
2011 $2.34
2010 $2.11
2009 $2.00
2008 $1.92

Conclusion:

The Walt Disney Company is another stalwart of the American business world.  The company has fairly strong financials and has a very strong history of earnings growth.  Unfortunately, Defensive Investors and Enterprising Investors following the approaches set forth in Benjamin Graham’s The Intelligent Investor set very stringent requirements for the companies in which they invest, and Disney does not pass those requirements.  In particular, the company has a poor current ratio and trades at a high PEmg ratio.  From a valuation perspective, the company does seem to be fairly valued, as the market implied growth rate is very close to what has been seen historically.

What do you think?  Is Disney fairly valued?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author was long Disney at the time of publication.

Photo Credit:  Andrew Magill


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