How Should You Value The Walt Disney Company’s (NYSE:DIS)?
Choosing the right financial tool to evaluate a company can be a daunting task, especially when different models are giving you drastically different conclusions. For example, my discounted cash flow (DCF) model tells me that The Walt Disney Company’s (NYSE:DIS) is overvalued by 28.04%, but my relative valuation tells me it’s undervalued by 3.49%. Which model do I listen to and more importantly why?
See our latest analysis for Walt Disney
Examining intrinsic valuation
Forecasting anything into the distant future is difficult and the same applies to forecasting free cash flows (FCFs) for businesses. This is why I’ve decided to use analyst FCF forecasts in my DCF to see what the consensus view is while also removing some subjectivity. If you’re unfamiliar with valuation, the assumption behind every DCF is that a firm’s true value is derived from the sum of all its future FCFs, which is why quality forecasts are important. After discounting the sum of DIS’s future FCFs by 10%, it’s equity value comes to $US$135.8b, then 1.49m shares outstanding are divided through. This results in an intrinsic value of $91.29. Check out the source of my intrinsic value here.,
But how accurate is this figure? Since it is generally impossible to forecast FCFs indefinitely, it is common for analysts to forecast for an explicit forecast horizon and then assume the company is mature by the end of that period and in a stable growth phase. At -0.18%, final year FCF growth is unsustainably low. If this assumption held true, DIS would shrink to a point where it would cease to exist very soon, which is a highly unlikely outcome. To improve our DCF analysis, we could extend the terminal year until FCF growth moderates to a more sustainable level around 1% to 5%. However, the trade-off is that there are less analyst forecasts the further in the future we go.
Deep-dive into relative valuation
The assumption behind relative valuation is that two companies with similar risk-return characteristics should have the same price since investors theoretically would be indifferent to purchasing either company. Unfortunately, the hardest part is finding companies that are similar enough to DIS to compare it against. As such, I’ve used the overall Entertainment industry as DIS’s proxy. Obtaining the fair value of DIS through relative valuation is quite straightforward. We simply multiply DIS’s earnings by the industry’s P/E ratio, which gives us a share price of $120.97 that implies DIS is currently undervalued. However, is this conclusion robust enough for us to use?
To check the robustness of our relative valuation, let’s take a look at if DIS has a similar growth profile to the overall Entertainment industry. With a projected earnings growth rate of -3.58% for next year, DIS has a similar growth profile when compared with the Entertainment industry, which is projected to grow at -8.44%. This demonstrates that the Entertainment industry is a good proxy for DIS and ideal for our relative valuation.
What Model Should I Listen To?
Neither model is perfect despite the robust financial theory behind them. Relative valuation is straightforward but prone to overall market mispricing. Meanwhile, intrinsic valuation is independent from market tendencies; however, is highly exposed to human error. Given the pros and cons that I have laid out, I encourage you to derive a valuation by calculating a weighted average share price by using both models.
Next Steps:
For DIS, I’ve compiled three essential factors you should look at:
Financial Health: Does DIS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does DIS’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of DIS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
