DJIA Analysis - The Walt Disney Company
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Finding the Intrinsic Value of the Market
In this investing series, I seek to find the intrinsic value of the Dow Jones Industrial Average through a brief fundamental analysis of each of the 30 companies included in the average, with the goal of deriving an intrinsic value for the market as a whole through a ‘sum of the parts’ analysis. I will also attempt to make recommendations on how to play each company on the DJIA for optimal investing performance.
In this article, I will attempt to analyze The Walt Disney Company’s market prospects for 2012 and beyond with a brief fundamental analysis:
Business: The Walt Disney Company (NYSE: DIS)
You all may know Disney as the company that owns Disney World or Disney Land. Or maybe you know The Walt Disney Company by its amazing and classic animated movies (The Lion King and Snow White among my favorites). Well, Disney isn't just animated movies and a theme park. It's also non-Animated movies! With Pirates of the Carribean being among Disney's new star hits.
Just kidding, while all of that is true, Disney is no longer just a place for little kids to visit their childhood dreams. Disney's ownership of ESPN makes it much more than that. Suddenly, Disney is home to the NBA Controversies (Heat or Bulls? I take the Heat. Just a fun team to watch, even without Wade), and the NFL(Fantasy Football is a trend I have yet to join, but I promise next season it will happen). Disney's expansion to a larger area of US culture is the perfect area of expansion for Disney, as it fits with the prior history of Disney's business in a weird way. While Buffett companies have what you could call an 'economic moat,' Disney has a 'cultural moat,' and ESPN's barriers to entry fit this model perfectly. Yes, I could go to a different theme park over the summer...but its Disney. Yes, I could go to sports.yahoo.com for my sports news...but its ESPN. Its a cultural and brand based boundary that is tough to break, and gives Disney a nice edge over its competition.
Growth/Prospects:
According to Fool.com, we can expect 21% EPS growth for Disney next year. Finviz.com gives Disney a Forward P/E of 11.46, cheap compared to the growth expected for next year. For the next 5 years, Disney is expected to have at least 13% annual earnings growth.
Intrinsic Value:
To get an intrinsic value for Disney, I will use a DCF valuation for my calculations. Over the last four years, FCF has remained about constant, so for the next 10 years, I will use a 2% FCF growth rate and a 10% discount rate in my calculations. With a terminal growth rate of 0%, extremely conservative calculations of FCF growth for Disney, Disney's intrinsic value is $50.85.
Recommendation:
Because Disney Call options are so cheap, I would take advantage of this 25% undervaluation by buying 2014 LEAPS In The Money call options, as a replacement for Stock. I expect Disney stock to appreciate well over the next year or two.
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