DIS Stock Study (7-26-23)

Posted by Mark on October 5, 2023 at 06:40 | Last modified: July 26, 2023 18:55

I recently did a stock study on The Walt Disney Co. (DIS) with a closing price of $85.63.

M* writes:

     > Walt Disney owns the rights to some of the most globally recognized
     > characters, from Mickey Mouse to Luke Skywalker. These characters
     > and others are featured in several Disney theme parks around the
     > world. Disney makes live-action and animated films under studios
     > such as Pixar, Marvel, and Lucasfilm and also operates media
     > networks including ESPN and several TV production studios. Disney
     > shifted into a more streaming-focused firm by acquiring the
     > remainder of Hulu and launching Disney+ and ESPN+. Across its
     > streaming platforms, Disney had over 235 million subscribers as of
     > September 2022, up sharply from under 64 million in December 2019.

Over the past decade, this mega-size ( > $50B annual revenue) company has grown sales 6.0% per year. EPS has grown 12.7% per year from ’13-’19 before falling off the COVID-19 cliff in ’20. A full recovery is still years away, and for this reason the company does not pass visual inspection.

Pressing on to entertain [pun intended] the possibility of a smaller, more speculative holding, PTPM trails peer and industry [declining] averages with a last-5-year mean of 10.5%. ROE also trails peers and the industry with a last-5-year mean of 8.4%. Debt-to-Capital is lower than peer and industry averages with a last-5-year mean of 36.1%.

Interest Coverage is 4.6 and Quick Ratio 0.83. M* rates the company “Exemplary” for Capital Allocation while Value Line awards an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 8.2% YOY and 6.8% per year for ’23 and ’22-’24, respectively (based on 23 analysts).
• YF projects YOY 4.1% contraction and 5.5% growth for ’23 and ’24, respectively (28 analysts).
• Zacks projects YOY growth of 8.1% and 5.4% for ’23 and ’24, respectively (6).
• Value Line projects 4.9% annualized growth from ’22-’27.
• CFRA projects growth of 8.8% YOY and 7.8% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 6.7% per year while projecting 6.0% per year for the next five years in its analyst note.

I am forecasting below both long-term estimates at 4.0% per year.

With regard to EPS growth:

• CNN Business projects 7.1% YOY and 20.2% per year for ’23 and ’22-’24, respectively (based on 23 analysts), along with 5-year annualized growth of 22.8%.
• MarketWatch projects 15.2% and 16.7% per year for ’22-’24 and ’22-’25, respectively (29 analysts).
• Nasdaq.com projects 25.5% and 24.8% per year for ’23-’25 and ’23-’26 [9, 5, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 21.1%.
• YF projects YOY 4.2% contraction and 34.9% growth for ’23 and ’24, respectively (26), along with 5-year annualized growth at 19.1%.
• Zacks projects YOY growth of 6.2% and 36.5% for ’23 and ’24 (9), along with 5-year annualized growth of 11.8%.
• Value Line projects 37.7% annualized growth from ’22-’27.
• CFRA projects 13.3% YOY and 24.8% per year for ’23 and ’22-’24, along with a 3-year CAGR of 20.0%.
• M* projects long-term annualized growth of 21.4%.

Given the large long-term-estimate range (11.9% to 37.7%), my initial thought was to forecast below the range at 11.0%.

The Zacks long-term estimate of 11.8% seems a bit quirky, though. They project 36.5% YOY for ’24 leaving only 20.0% further growth to be spread over the following four years.

Excluding the extremes results in a 4-long-term-estimate mean of 21.1%. I am truncating to get my forecast. I will use ’22 EPS of $1.75/share as the initial value rather than ’23 Q2 EPS of $2.25 (annualized).

My Forecast High P/E is 30.0. From ’13-’19, high P/E ranges from 14.1 (downside outlier in ’18) to 24.9 (’15). ’20 is NMF with negative earnings and for the last two years, high P/E is in triple digits. I expect this to normalize, which also suggests EPS should normalize [to be conservative, my forecast EPS growth over five years still ends up less than ’15 EPS]. My arbitrary forecast is near the top of my comfort zone.

My Forecast Low P/E is 15.0. From ’13-’19, low P/E ranges from 11.6 in ’18 to 16.0 (’15 and ’19). ’20 is NMF with negative earnings and for the last two years, low P/E has been ~106 and 51.6. Once again, I seem to have two distinct distributions from which to forecast. I am sticking with the former even though the latter will probably rule until EPS significantly rebounds toward pre-COVID levels. Only 13.8 in ’13, 14.8 in ’14, and 11.6 in ’18 are lower than my forecast.

I also need to determine what number to use as low EPS because [default] TTM seems unreasonably low. With the worst of COVID-19 seeming well behind us, zero-growth should not be based off a depressed value. Given my high EPS at $4.54/share, I will use $4.00 for low EPS, which represents zero-growth since 2014.

My Low Stock Price Forecast (LSPF) of $60.00 is the default value based on my Forecast Low P/E and low EPS. This is 29.9% less than the previous close and 28.7% less than the 52-week low.

These inputs land DIS in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 9.7%.

Dividend payout was suspended in ’21 (if not a bit earlier). While analysts expect it to be reinstated at some point, I am forecasting 0% Payout Ratio for now.

PAR (using Forecast Average—not High—P/E) is 3.6%, which is lower than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 9.7% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 305 studies done in the past 90 days [121 outliers including my study excluded], averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 7.0%, 21.4%, 40.0, 20.0, and [interestingly] 24.1%. I am lower across the board. Value Line projects an average annual P/E of 19.0, which is less than both MS (30.0) and mine (22.5).

MS high / low EPS is $4.92 [median] / $2.20 vs. my $4.54 / $4.00 (per share). Mean MS high EPS is $6.08/share, which implies significant uncertainty. Looking back over my analysis, I empathize wholeheartedly.

MS LSPF of $71.80 implies a Forecast Low P/E of 32.6 vs. the above-stated 20.0. MS LSPF is 63.2% greater than the default value of $2.20/share * 20.0 = $44.00. I rarely see such an enormous discrepancy, which may be further evidence of confusion [i.e. MS low EPS needs to be greater].

I think MOS in the current study is at least moderate if not robust. Value Line and M* project high EPS of $8.65 and $4.61/share, respectively [based on this difference, one could even say the professionals seem confused]. Also, MS projects a mean total return of 19.2% compared to my 9.7%.

Valuation metrics are conflicted on the company. PEG ratio is 1.9 (Zacks) while Relative Value [(current P/E) / 5-year-mean average P/E] is 1.2 (M*). Both suggest the stock to be overvalued. According to Kim Butcher’s “quick and dirty DCF,” the stock should be priced at 15 * [$11.35 – ($0.00 + $2.50)] = $132.75 (i.e. stock undervalued by 35.0%).

I would look to re-evaluate DIS under $79/share.

There is certainly debate to be had over how to approach this analysis. Using ’22 or ’21 for low EPS essentially pushes the company back many years for what was clearly a COVID-driven decline. Suspending the dividend significantly impacts valuation as [Kim Butcher’s] Quick-and-Easy DCF decreases from $132.75 to $102.75/share when Value Line’s $2.00/share [projected future] dividend is included. Maybe a depressed low EPS is valid given the suspended dividend, but I still can’t reconcile pushing the company back more than a decade with a sub-$2.00/share EPS. Confusion rules the day, and nobody’s efforts—neither MS, professionals, nor myself—seem to be spared!