Disney: The happiest stock in your portfolio?
Opdateret: 6. feb.
Disney is one of the most recognized brands in the world. An investment in Disney will give you exposure to all kinds of different sectors, such as streaming, linear TV, movie studios, theme parks, hotels, and cruise lines. And there will likely be more to come. Many of the sectors that Disney operates in have struggled during the pandemic, so the question is if it is time to buy Disney now?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Disney. If you would like to know what I have in my portfolio, or you want to copy it, you can read how to do so here. I am a huge fan of the company, and I pretty much learned to read by reading Disney comics. I'm also a big fan of some of their franchises such as Star Wars, and I use Disney +. However, my experiences with the company will not be reflected in the analysis, as I will keep it unbiased.
Disney was founded in 1923 and is an American multinational entertainment and media conglomerate. They have activities in all sorts of different sectors such as streaming, TV stations, movie studios as well as theme parks, hotels, and cruises. As a result of their latest organizational change by former CEO Bob Chapek, Disney has divided their businesses into two segments: Disney Media and Entertainment Distribution (66 % of revenue in fiscal 2022) and Disney Parks, Experiences and Products (34 % of revenue in fiscal 2022). Disney is known throughout the world for their characters such as Mickey Mouse and Donald Duck, as well as their movie franchises, in which the own the two most profitable franchises in Marvel and Star Wars. I believe that most people know Disney, which is why I won't to a long description of the company. As most people around the world knows Disney, it is obvious that Disney has a huge brand moat.
Their CEO is Bob Iger. He has just returned as CEO in November 2022 for the next two years. He previously served as CEO from 2005 until 2020. He first joined Disney in 1996 and held several positions until he was named CEO. During his first tenure in Disney, he was recognized as one of the best CEOs of Disney ever. He was responsible for the acquisitions of Pixar (2006), Marvel (2009), Lucasfilm (2012), and 21st Century Fox (2019). He was also responsible for the launch of Disney+ and for opening Disney's first theme park and resort in mainland China. Bob Iger's first tenure as CEO was also good for investors, as the stock had an annualized gain of 12,3 %. As a leader, he believes in simple communication and no more than three strategies. In his first tenure he focused on generating the best creative content possible, fostering innovation and utilizing the latest technology, and expanding into new markets. We haven't heard much about his strategy for his new tenure as CEO, but he has mentioned that he wants to maintain the hiring freeze initiated by the former CEO, he wants to introduce a new organizational structure that puts decision-making back in the hands of Disney's creative teams, and he wants to focus on making the streaming business profitable. During his first tenure as CEO, Disney was recognized as one of the most reputable companies in America and the world by Forbes (2006-2019), one of the world's most admired companies by Fortune magazine (2009-2021), and one of the world's most respected companies by Barron's (2009-2017). He has also been named CEO of the year several times. I believe that Bob Iger 's credentials prove that he is the right person for Disney the next two years, and I'm very comfortable with him as a CEO.
I believe that Disney has a huge brand moat. I really like the management as well. Now let us investigate the numbers to see if Disney does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. While Disney has shown some great numbers in the past, it is obvious that the company has suffered during the pandemic. The numbers from fiscal 2020 and onwards have been unacceptable, and I will need to see much better numbers in fiscal 2023 before considering investing in the company. Hopefully, we are not experiencing another pandemic anytime soon, but I will need to see Disney getting back on track before investing in the company.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The numbers are pretty solid, as they almost grow their equity year over year. We see a huge jump in 2019 because of the $71.300.000.000 acquisition of 21st Century Fox that boosted the equity that year.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditure. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Free cash flow looks very good until the acquisition of 21st Century Fox in 2019. Since then, free cash flow has still been positive but has decreased significantly, and so as the leveraged free cash flow margin. It is another prove that the pandemic has been very hard on Disney, as they have only managed to deliver a leveraged free cash flow margin just above 1 % in the last fiscal year.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculations on Disney, it shows a large debt that can be paid off in 14,4 years! The high debt is due to acquisitions. Especially the acquisition of 21st Century Fox, which is the largest acquisition ever for Disney. I personally don't like to invest in companies with such a high debt, and I would like to see management being focused on paying off debt.
Like with all other companies, there are some risks you need to consider, if you are going to invest in Disney. A decline in economic activity. Lately, there has been a lot of talk about a recession in the United States. Past declines in the economic resulted in reduced spending in their parks and resorts, while it affected prices for advertising in their broadcast and cable networks. It could also result in fewer streaming subscriptions. Higher labor costs. We are seeing higher labor costs around the world, and if they continue to rise, it will hurt revenue for a company like Disney that employs 220.000 people. It isn't only salaries but also increases in something like health care would hurt revenue. High debt. The high debt that Disney has accumulated due to their acquisition of 21st Century Fox and because of the pandemic, could decrease business flexibility as there is a ceiling in how much debt the company can take. I don't think a company like Disney will go bankrupt but not being able to take on more debt could hurt future growth.
It isn't all risks, there are also a lot of potential for Disney moving forward. The end of the pandemic. We have seen on the numbers earlier in the analysis that the pandemic has significantly hurt the performance of Disney. Nonetheless, we have seen areas like theme parks during very well in the latest fiscal years, where domestic visitors have ramped up their spending by 40 %. As the pandemic ends, we should see more international visitors in them parks as well. Furthermore, the end of the pandemic should also be good for other businesses, like their cruises. Disney+ will be profitable. Right now, Disney+ is not profitable but management expect it to be profitable by fiscal 2024. Management has a plan to double the numbers of markets for Disney+. It is now available in 80 countries, and management expects to reach more than 160 countries by 2024. Furthermore, they are toying with the idea of making a new subscription that allows advertisement, which would be a cheaper option than the current subscription. It might help in keeping some of their customers that would have cancelled the subscription and attract new customers. New business ventures. Management has mentioned that they are looking into new business ventures, such as sports betting, gaming and the metaverse. I believe that sports betting could be interesting due to the synergies with ESPN+. The sports betting market is expected to grow by a 10,2 % CAGR until 2028, and it could be another revenue stream for Disney.
All right, we have gone through the numbers, potential and risks regarding Disney, and now it is time for us to calculate a price for Disney. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 4 (which is much higher than the current one but slightly lower than the ones prior to the pandemic in 2018 and 2019). I chose an Estimated future EPS growth rate of 15 (which is lower than what analysts expect but it is the highest I use), Estimated future PE 22,5 (it is the highest historical P/E) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $90, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Disney at price of $45 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 6.010. The Capital Expenditures was 4.943. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 3.460,1 in our further calculations. The Tax Provision was 1.732. We have 1.781 outstanding shares. Hence, the calculation will be like this: (6.010 - 3.460,1 + 1.732) / 1.781 x 10 = $24 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". The free cash flow per share last year was 0,59 but I believe it will grow. Hence, I have decided to use the average free cash flow per share over the last 5 years, which is 2,25 With the Free Cash Flow Per Share at 2,25 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $35,52.
I believe that Disney is an interesting company due to their large moat. I also like that Bob Iger has come back to Disney for the next two years, as he did a tremendous job in the previous tenure. However, I don't like the performance of Disney over the last couple of years, where they have delivered an unacceptable ROIC. I don't like their large debt either, and I don't think Disney will perform particularly well if we face recession. If I should open a position in Disney at some point, I would like to see a higher ROIC and a higher free cash flow yield. I would also like to see that they manage to make Disney+ profitable prior to investing in the company. Hence, for the time being, I'm not interested in adding Disney to my portfolio.
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