Is DIS undervalued? I think so

June 8, 2018

Is DIS undervalued? I think so

We’re moving fully into summer, and that means kids are home from school and families are planning vacations. Growing up as a kid, and then again as a parent, it seemed like Walt Disney theme parks always found their way into my family’s vacation plans. We didn’t go often – a trip to Disneyland or Disney World has always been considered as a treat rather than an expectation for me and my family – but all the same, it seems like every summer we end up talking about and debating for or against a Disney trip.

Walt Disney Co. (DIS) does a whole lot more than just amusement parks, of course. Their largest source of revenue comes from their media networks – ABC, ESPN, Disney Channel, and so on – while parks and resorts are the second-largest revenue source at about 33% of 2017 revenues. And of course, not to be ignored is the company’s studio entertainment segment, where they own some of the biggest and most popular franchises. Moving into summer also means a new round of summer popcorn flicks, and DIS got that train rolling early, with Marvel’s “Black Panther” in February, “Avengers: Infinity War” in April, and “Solo: a Star Wars Story” in May. Still to come: a long-anticipated sequel to the popular Pixar hit “The Incredibles” this month, and still another Marvel sequel with “Ant-Man and the Wasp” on July 16.

DIS is one of those companies that everybody knows about but that stock investors have trouble categorizing, because of the way the company has built out these separate business segments. You can’t just call them a broadcasting company, they aren’t just a film studio, and they aren’t just a parks and resorts business, either. They’ve also managed to successfully link all three major segments in a way that complements and enhances each other in meaningful ways. And they aren’t sitting on their hands when it comes to emerging trends like streaming, on-demand content; they are on track to launch their own streaming service to contend with Netflix (NFLX), Hulu and Amazon Prime. They are also in talks to acquire a number of assets of Twenty-First Century Fox (FOX), including several of the Marvel properties that studio has held rights to for decades. They really are a multimedia conglomerate and merchandising powerhouse.

The ironic thing about their stock is that despite their ubiquitous presence on TV, in movie theaters, and theme parks and resorts flung across the world is that investors seem to be discounting the stock. It’s current price is a little above $100, so the idea they are actually trading right now at a discount might seem silly, but bear with me. I think part of the reason this is the case is because of the market’s tendency to fall in love with the trendiest, most buzz-worthy thing out there. In the media and broadcasting space, that is streaming, and for stock investors, the biggest name in streaming right now and for the foreseeable future is Netflix.

The popularity of streaming content – including original content – has been driven primarily by Netflix, with Amazon Prime and Hulu not far behind. It is a primary reason companies like DIS and CBS Corp (CBS) are planning their own respective streaming services. Even so, the market’s focus on NFLX seems disproportionate; as of this morning their market cap is $156.8 billion, while DIS’ market cap is $153.2 billion. If that doesn’t sound strange, consider that NFLX is a one-trick pony with $12.7 billion in revenue for the last twelve months, while DIS, with multiple revenue streams worldwide, generated nearly $57 billion in sales for the same period. The disparity is a reflection of the fact that investors have been clamoring to get on board the NFLX train, driving its stock price from around $100 in the fourth quarter of 2016 to more than $360 per share today. And while that’s a good thing for those who got in early, the question now is where the better opportunities for growth lie? My bet is on DIS’ multi-faceted and diversified business.

Fundamental and Value Profile

The Walt Disney Company is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The media networks segment includes cable and broadcast television networks, television production and distribution operations, domestic television stations, and radio networks and stations. Under the Parks and Resorts segment, the Company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The studio entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. It also develops and publishes games, primarily for mobile platforms, books, magazines and comic books. The Company distributes merchandise directly through retail, online and wholesale businesses. Its cable networks consist of ESPN, the Disney Channels and Freeform. DIS has a current market cap of $153.2 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 22%, while sales grew a little over 9%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
  • Free Cash Flow: Free Cash Flow is healthy, at more than $10.6 billion over the past twelve months. Free Cash Flow has been growing steadily, with only occasional, one-quarter dips since 2013.
  • Debt to Equity: the company’s debt to equity ratio is .39, which is low number. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with healthy cash reserves as well.
  • Dividend: DIS pays an annual dividend of $1.68 per share, which translates to an annual yield of 1.62% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DIS is $32.35 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.19. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Media industry’s average is 4.6, so DIS’ Price/Book ratio is almost 50% below the industry average and bolsters my argument the stock is being overlooked versus its counterparts right now.

Technical Profile

Here’s a look at the stock’s latest technical chart.

DIS 1-year chart

  • Current Price Action: Over the last week or so, DIS has rallied from a low at around $99 per share to push up towards intermediate-term resistance, which appears to be around $104. It’s 52-week high is around $113 per share and was reached in mid-January of this year. It is also worth noting that the stock’s all-time highs are around $120 and were last seen mid-year 2015. That provides a long-term target price that is nearly 20% above the stock’s current price. Considering the stock’s relative discount to its peers in the Media industry, I think this is a reasonable long-term target.
  • Trends and Pivots: The red diagonal line represents the stock’s intermediate-term trend, which is clearly down and is the reference point for where I think the stock’s closest resistance is likely to be. Over the last two months, the short-term trend has been mostly sideways, though the stock does appear to be trying to break out of that pattern at present. The key to whether DIS can stage a significant trend reversal is that resistance at $104. A break above that point should give the stock good short-term momentum to push near to its 52-week highs. If the stock’s current, short-term sideways trend holds, we’ll see the stock drop back towards $99; a move below that level would mark a continuation of the downward trend into a long-term period of time. In that case, the next most likely support level would be in the $90 range, which the stock hasn’t approached since late 2016.
  • Near-term Keys: Watch the stock’s movement carefully over the next week or so. A move to $105 would mark a big bullish breakout and should give the stock plenty of room to rally to about $113 per share, which should be a no-brainer for a good bullish trade, either by buying the stock or working with call options. On the other hand, a break below $99 could see the stock drop as low as $90 per share, which might offer an attractive bearish trade, either by shorting the stock or using put options.