Does The Walt Disney Company’s (NYSE:DIS) 39% Undervaluation Have A Chance?

Today we run one method of estimating the intrinsic value of The Walt Disney Company (NYSE:DIS). This is done by taking expected future cash flows and discounting them to today’s value. The discounted cash flow (DCF) model is used for analysis. Believe it or not, as this example shows, it’s not that hard to understand!

But remember, there are many ways to estimate a company’s value, and DCF is just one. If you want to learn a little more about intrinsic value, you might want to read the Simply Wall St analytical model.

See Walt Disney’s latest analysis

Is Walt Disney rated fairly?

As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is generally a period of high growth that levels off towards the closing price captured in the second “steady growth” period. First, we need to get an estimate of cash flow for the next 10 years. We use analyst estimates when available, but if these are not available, we extrapolate previous free cash flow (FCF) from previous estimates or reported values. Over this period, we expect companies with shrinking free cash flow to contract at a slower rate, and those with growing free cash flow to see slower growth. This is to reflect that growth tends to slow in the early years rather than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to get an estimate of present value.

10-Year Free Cash Flow (FCF) Forecast

(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = $94 billion

story continues

The second stage, also called terminal value, is the cash flow of the business after the first stage. We use the Gordon Gross formula to calculate the terminal value at a future annual growth rate equal to his 5-year average of 2.0% for 10-year Treasury yields. Discount the final cash flows to today’s value at a cost of equity of 8.1%.

Terminal value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$21 billion × (1 + 2.0%) ÷ (8.1%– 2.0%) = US$356 billion

Present Value of Terminal Value (PVTV)= television / (1 + r)^Ten= US$356 billion ÷ ( 1 + 8.1%)^Ten= US$164 billion

Total value, or equity value, is the sum of the present value of future cash flows, in this case US$258 billion. The final step is to divide the stock value by the number of outstanding shares. Compared to its current stock price of $86.9, the company is 39% cheaper than its current stock price and looks significantly undervalued. However, evaluation is an imprecise tool, like a telescope. Move a few degrees and you’ll end up in another galaxy. Remember this.

important premise

The above calculation relies heavily on two assumptions. One is discount rate and the other is cash flow. You do not have to consent to these inputs. I encourage you to redo the calculations yourself and play with them. The DCF also does not give a complete picture of a company’s potential performance, as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are looking at Walt Disney as a potential shareholder, the cost of capital is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for the debt. For this calculation we used 8.1% based on a leverage beta of 1.092. Beta is a measure of a stock’s volatility relative to the market as a whole. Our betas are derived from industry average betas of globally comparable companies and are capped between 0.8 and 2.0. This is a reasonable range for a stable business.

Walt Disney SWOT Analysis

strength

weakness

chance

threat

Next steps:

A company’s valuation is important, but ideally it’s not the only analytical factor that scrutinizes the company. The DCF model is not a complete equity valuation tool. Rather, it should be viewed as a guide to “What assumptions need to be true for this stock to be undervalued/overvalued?” For example, changes in a company’s cost of equity or risk-free ratio can have a significant impact on the valuation. What makes the stock price below intrinsic value?He summarized three key factors to watch out for when it comes to Walt Disney.

1. financial soundness: Is DIS’s balance sheet healthy? Check out our free balance sheet analysis with 6 quick checks on key factors like leverage and risk.

2. future earnings: How does DIS’s growth rate compare to its peers and the broader market? Manipulate our free analyst growth forecast charts to dig deeper into analyst consensus numbers for the next few years.

3. Other solid businesses: Low debt, high return on equity and a strong past performance are the cornerstones of a strong business. Explore interactive stock listings with solid business fundamentals to see if there are other companies you haven’t considered!

PS. The Simply Wall St app conducts discounted cash flow valuations for all NYSE stocks on a daily basis. If you want to find calculations for other stocks, search here.

Do you have feedback on this article? What interests you? contact directly with us. Or send an email to our editorial team (at) Simplywallst.com.

This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …

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