Disney stock analysis
Disney’s highly recognized brand and very profitable sports channeled to a double net income and operating cash flows from 2010 to 2016. Because of its great financial performance, the company has paid dividends to its shareholders every year, which makes Disney an attractive option for investors. The company has consistently paid dividends from 1993 to 2016. Disney started paying dividends on a semi-annual basis instead of an annual basis since 2015 (Dividend Date). Its Dividends Per Share for the three months ended in Jun. 2016 was $0.71, which is as same as that of the last six months in 2015 (Dividend Date). On the contrary, unlike its stable dividend, the stock price experienced a quite big drop from $114.00 in Dec. 2015 to 96.98 in Jun. 2016.
Walt Disney’s Common Stock per Share Using the Valuation Analysis
The company had issued 1,707,000,000 shares as of 27th September 2014 with total equity of $ 48,178,000,000. This would roughly translate the value of the share to be at $ 28.22 per ordinary share. The value is far much less than the actual value of the company’s trading value at the NYS Exchange under the ticker symbol “DIS”. The highest sales value was at $ 91.20 while the lowest sales value was $ 63.30 per ordinary share held (Alan et. al)
Discounted Cash flows (DCF) is a valuation technique used to evaluate the attractiveness of a venture opportunity. DCF investigation utilizes future free cash flow projections and discounts them to arrive at a present value appraisal, which is utilized to assess the potential for the venture. On the off chance that the value arrived at through DCF investigation is higher than the present expense of the investment; the opportunity may be good to invest in. The accompanying data demonstrates the development rate of Walt Disney organizations development potential (Luís, J. D. O. V. (2014).
Retention rate = (Net salary owing to The Walt Disney Company – Dividends) / Net wage owing to The Walt Disney Company
= (8,382.0 – 3,063.0) / 8,382.0 = 0.630
Net revenue = 100 * Net salary owing to The Walt Disney Company / Revenues
= 100 * 8,382.0 / 52,465.0 = 15.980%
Asset turnover = Revenues ÷ Total assets
= 52,465.0 / 88,182.0 = 0.590
Financial leverage = Total assets / Total Disney Shareholder’s equity
= 88,182.0 / 44,525.0 = 1.980
g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.810 * 13.430% * 0.570 * 1.88 = 11.710%
This shows that the future earnings of Walt Disney Company are expected to grow by 11.71% hence is expected to grow in the future since it has got a consistent performance.
Walt Disney Co., current enterprise value calculation
Current share price (P) $ 114.24
No. shares of common stock outstanding 1,653,177,887
USD $ in millions
Common equity (market value) 188,859
Add: Preferred stock, $.01 par value; issued – none (per books) –
Add: Non-controlling interests (per books) 4,130
Total equity 192,989
Add: Current portion of borrowings (per books) 4,563
Add: Borrowings, excluding current portion (per books) 12,773
Total equity and debt 210,325
Less: Cash and cash equivalents 4,269
Enterprise value (EV) 206,056
Return on common equity is a clear proportion that measures Walt Disney’s return on its investment by shareholders. As the larger share of the profitability ratios we talked about, it is normally expressed in percentage terms, and a higher value is better. (Tangen, 2005)
Return on Common Equity = (Net Income)/ (Average Shareholders’ Equity)
The following pie chart shows Walt Disney’s contribution to segments to revenue.
Walt Disney Co.’s ROCE deteriorated from 2012 to 2013 but then improved from 2013 to 2014 exceeding the 2012 level. (United States Securities and Exchange Commission)
ROCE rises when the average common equity value falls and falls when equity rises. The segments of common equity in corporate retained earnings and the returns from issuing common stock. Walt Disney’s retained earnings sum is the accumulated net income after paying common and preferred dividends. On the off chance that the organization issues common shares or decreases its dividend payment amid a specific reporting period, the average equity would increase. This would mean a lower ROCE, expecting that the net income remains the same. On the other hand, if the organization purchased back its stock or expands its dividend payments, average equity would fall and ROCE would rise (United States Securities and Exchange Commission).
Some of the components that affect ROCE of Walt Disney Company are as follows:
Business Income or Loss
As a component of the yearly accounting procedure, Walt Disney’s’ income and expense line is moved from the income statement to the balance sheet within the retained earnings. Accomplished by a series of journal transactions, the last effect of this procedure results in a company’s net income as reported on its income statement, bringing on an increment to shareholders’ equity, or its net loss, bringing about a decrease to shareholders’ equity (United States Securities and Exchange Commission).
Relative Valuation Model
A business valuation strategy that looks at a company’s value to that of its rivals to decide the company’s money related worth. Relative valuation models are a different option for absolute value models, which attempt to decide an organization’s natural worth in light of its evaluated future free cash streams marked down to their present quality. Like absolute value models, speculators may utilize relative valuation models while figuring out if an organization’s stock is a good purchase (Luís, 2014).
The discounted cash flow model gives a Walt Disney share price estimation of $88, 52 which, contrasted with its market price of $85, 38, represents a purchasing opportunity. The second valuation technique is the Economic Value Added model. Through this valuation strategy, the Walt Disney share price is evaluated as of $77, 89 which, contrasted with its market price, represents a selling opportunity. The third valuation system exhibited is relative valuation. By applying the Enterprise Value to EBITDA multiple, it is accomplished an organization offer price of $83, 96 which additionally represents a selling opportunity (Luís, 2014).
According to the financial analysis data above it shows that Walt Disney Company has an enterprise value of 206,056 which shows that the firm has got a high valuation which means it increased from the previous years 2013 and 2014. Also, the firm has a return on common equity of 8.78 in the year 2014 financed by non-user funds hence the firm is not highly leveraged hence an advantage to the firm in terms of dividends payout. The firms’ growth is at 11.97% basing on the discounted cash flows of Walt Disney Company. According to the figures calculated above it shows that Walt Disney Company has got a high growth potential since its earnings are expected to grow past 50% over the future (Luís, 2014).
Disney spent $5.9 billion on repurchasing common stock as nine months ended, of which 1.5 billion is spent in its last fiscal quarter. There is an increase in common stock repurchases of $3.1 billion ($5.9 billion compared to $2.8 billion in the prior-year period) (10-Q). This increasing repurchase might are motivated by managements’ belief that Disney’s shares are undervalued. According to the data, as a whole, Disney’s stock price is decreasing after December 2015 (Stock Analysis). As a result of this, Disney can decrease shares outstanding, increase EPS and then increasing the stock price by repurchasing common stock.
Disney shows prevailing Real Value of $104.09 per share (Macroaxis). The current price of the firm is $96.71. At this time the firm appears to be undervalued. According to the 10-Q as of the last fiscal quarter, Disney issued 2.9 billion shares common stock, hence, Disney’s market value is about $1,823 billion now.
Stock price movement
In the last fiscal quarter, Disney’s stock experienced a rise at first while a downward tendency later. Specifically, starting from $96.16 in April, the price went up to $106.6 in May, which is the highest price since the year of 2016 (Stock Analysis). Then the price declined to $98.41 and keep a slight fluctuation for about one month (Stock Analysis). At the end of June, the price fell to the bottom $94.38 (Stock Analysis). And it was increasing when this quarter ended.
As of today, Disney’s weighted average cost of capital is 11.39%. Its return on invested capital is 15.82%. Disney generates higher returns on investment than it costs the company to raise the capital needed for that investment. Since Disney has positive excess returns, there are more opportunities for it to increase its growth and value.
Disney’s gross profit for the three months ended in Jun. 2016 was $7,076 Million and Its revenue for the three months ended in Jun. 2016 was $14,277 Million (Value Investing). Therefore, Disney’s Gross Margin for the quarter that ended in Jun. 2016 was 49.56%, the highest in the past 13 years, which shows a durable competitive advantage.
Disney’s annualized net income for the quarter that ended in Jun. 2016 was $10,388 Million and its average shareholder equity for the quarter that ended in Jun. 2016 was $44,159 Million (10-Q). Therefore, Disney’s annualized return on equity (ROE) for the quarter that ended in Jun. 2016 was 23.52%. This number means Disney uses investment funds well to generate earnings growth.
According to the 10-Q, for the last fiscal quarter, Disney’s total debt was 20,441 million, including short- term debt $5,312 million and long-term debt $15,129 million (10-Q). Disney had no preferred stock this fiscal quarter. And its common equity was $35,683 million (10-Q). Therefore, Disney’s capital structure consists of 36.4% debt and 63.6% common equity.
The financial statements of the organization are imperative in helping the shareholders, management, employees’ competitors, creditors and potential investors in making sound financial choices. The examination help in knowing the firm’s capacity to meet short-term maturing obligations and, also, know the degree to which non-user supplied funds finance the firm. This will likewise enable contrasting firm’s performance and other firms in the business and also compare the company’s performance after some time by doing trend analysis. The statement helps likewise in the computation of the association’s theoretical value of securities.
The Discounted Cash flows (DCF) of Disney Company is calculated below:
Interest expense, debt and capital leases, after tax = Interest expense, debt and capital leases * (1 – EITR)
= 2,461 * (1 – 32.20%) = 1,669
EBIT(1 – EITR) = Consolidated net income attributable to Disney– Income (loss) from discontinued operations, net of income taxes + Interest expense, debt and capital leases, after tax
= 16,363 – 285 + 1,669 = 17,747
RR = [EBIT (1 – EITR) – Interest expense (after tax) and dividends] / EBIT (1 – EITR)
= [17,747 – 7,854] / 17,747 = 0.56
ROIC = 100 * EBIT (1 – EITR) / Total capital
= 100 * 17,747 / 131,775 = 13.47%
6 g = RR * ROIC
= 0.61 * 13.84% = 8.43%
This shows that the future earnings of Disney Company are expected to grow by 8.43% hence is expected to grow in the future due to its consistent performance.
Accounting principles adopted by the firm influence one’s analytical measures of the financial statements. The strategies utilized for amortization and depreciation may vary with those of competitors, and this would influence the cross-sectional investigation of the assets of the firm. Conversion of currency and methods used to change the time value of cash can give misjudged impression of debtors, creditors and also retained earnings. This will likewise influence the conclusions made on the series analysis.
The financial examination helps in understanding the predominant market as well as the organization and industry under investigation. At the point when the financial analysis is done potential investors can settle on investment decisions given deductions from the statements. This is crucial since now and again the value of the shares may be either exaggerated or underestimated as clear on account of Disney Company.
Alan Sangster and Frank Wood, Business Accounting 2 10th Editions, Pages 49-264
United States Securities and Exchange Commission; Annual Report Pursuant to section 13 or 15(d) of Securities Exchange of 1934 For the Fiscal Year Ended September 27, 2014 THE WALT DISNEYCOMPANY AND SUBSIDIARIES Commission File Number 1-11605.
JAJrIES, J., SYDNEY, A., & DuBOIS, J. O. L. RIOHARD B. SMITH. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549, FORM 10-K.
Luís, J. D. O. V. (2014). Equity Valuation Dissertation Walt Disney Company (Doctoral dissertation, Universidade Católica Portuguesa).
Hill, C., Jones, G., & Schilling, M. (2014). Strategic management: theory: an integrated approach. Cengage Learning.
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