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Using the VL Page_Business DiscThe Business Description for Walt Disney (DIS – Free Analyst Report) describes the company as operating media networks, amusement parks, a cruise line, a movie studio, and a consumer products division. That’s a long list of items that gives a flavor of the company’s varied offerings. In each of the sectors in which it operates, Disney is a material player—which is no small accomplishment. In fact, its market position in all of its fields is reminiscent of General Electric’s (GE – Free Analyst Report) now famous goal of being number one or two in every industry in which it competes.

Using the VL Page_Capital StructureOne of the driving factors behind Disney’s success has always been the company’s ability to think outside of the box, a byproduct of a corporate culture inspired by the company’s founder. Like any company, Disney has gone through lean times, but, of late, the times have been good, setting the company on a solid foundation. Debt accounts for just over 20% of the company’s capital structure, as noted in the Capital Structure box on the left side of the page. It handily covers interest expenses, also noted in that box. There is almost $3 billion of cash on the balance sheet, noted in the Current Position box, and its current ratio is solidly over 1.00 (current ratio is calculated by dividing current assets by current liabilities and gives a sense of a company’s ability to pay off near-term liabilities with assets Using the VL Page_Current Position Boxon hand).

Although the company’s annual dividend hasn’t increased every year, it has shown a general upward trend. The year-by-year dividend payments can be seen in the historical component of the Statistical Array, while in the Annual Rates box the 10-year average growth rate for the dividend is calculated at an annualized 6%. The company also scores highly on Value Line’s proprietary Earnings Predictability and Price Stability scores, found in the Ratings box at the bottom right of each Value Line report. In addition, Disney scores well on Price Growth Persistence, though not as highly as on the other measures. All of the above factors underscore both the Financial Strength rating of A and the Safety rating of 1 (the highest possible on this proprietary Value Line measure, which is found along with the Timeliness rank Using the VL Page_Historical Arrayin the Ranks box at the top left of each report).

Clearly, Disney’s iconic brands are backed by a company with staying power. They are also backed by a company that is trading at a relatively low price based on the stock’s historical trading range.

For example, Disney’s current Price to Earnings ratio (P/E), found in the Top Label section at the top of the report, of 15.5 is below both its trailing P/E and its median historical P/E. Looking at the Statistical Array provides a year by year review going back to 1994. Although the depths of the recent recession saw lower average annual P/Es, the current P/E is well below the 20, Using the VL Page_Top Label30, and 40 multiples seen as recently as the mid-2000s.

Examining how Disney’s P/E compared to that of the broader market provides important clues to its current valuation, as well. In this regard, the entertainment company is trading in line with the market, with a relative P/E of 0.97, which is found in the Top Label section. Looking back year-by-year in the Statistical Array provides a broader context, showing that relative P/Es of more than twice the market’s aren’t unheard of for this stock.

Dividend yield is another metric to examine. Although the current dividend yield of 1.1% isn’t something to crow about, it is about 50% greater than the average of 0.7% that was the norm in the late 1990s. The current dividend yield can be found in the Top Label, while historical dividend yields can be found in the Statistical Array. Note, too, that Value Line Using the VL Page_Annual Rates Boxanalyst Damon Churchwell expects dividend growth over the next three to five years to pick up from recent levels to over 11% per year, on average. This, along with the historical annualized rates of growth for dividends, can be found in the Annual Rates box. 

All of this suggests a company that is undervalued relative to its historical valuations. It is important to note, however, that the company appears to be valued in-line with the broader market. But Disney’s product portfolio is unique and one could easily argue that it deserves a valuation at least on par with that of the market. Unless, of course, the company’s future doesn’t appear as bright as it was in the past.

This isn’t the case. Although Churchwell expects earnings to slow from the breakneck Using the VL Page_Projections Box21.0% annualized growth pace of the last five years, he anticipates still-impressive 12.5% earnings growth over the next three to five years. That would put the pace above the average over the trailing 10 years—a period boosted by the heady growth over the trailing five-year span. (All of the historical and projected earnings growth rates can be found in the Annual Rates box.)

The 12.5% earnings growth rate translates into average annual earnings of about $4.10 over the next three to five years, as noted in the projections section of the Statistical Array. (Projections are presented in bold face type to the right of the row headings.) This earnings range translates into a price range of $60 to $70 a share, a 65% and 95% gain, respectively, from the company’s recent price range of $36. The projected price range can be found in the Projections box to the left of the Graph or displayed visually as dotted lines to the far right on the Graph. The Projections box contains both the price appreciation that the projected range confers, as well as an average total return range, which includes dividend payments. In Disney’s case, that range is 15% to 19%.

When considered in a historical context, now appears to be a good time for conservative investors seeking a relatively inexpensive entry point into this iconic company’s shares.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.