Many investors are predicting the demise of Walt Disney Co (NYSE:DIS) including InvestorPlace technical analyst expert Tyler Craig who suggested in mid-September that investors join the bears and maul the DIS stock price.
Whether we’re talking about lower earnings, subscriber defections at ESPN, its fight with Netflix, Inc (NASDAQ:NFLX) and several other issues facing the entertainment conglomerate, it’s easy to see why many see Disney’s moat around Sleeping Beauty’s castle rapidly disappearing.
This theory about Disney’s business model may or may not be true but before making that assumption, it’s important to value each of Disney’s operating segments in a sum-of-the-parts analysis to get an idea whether or not the DIS stock price is intrinsically overvalued or undervalued.
Normally, I like to do my own evaluation of a company’s 10-Qs and 10-Ks, but when somebody online has done an excellent job analyzing all of Disney’s parts, why bother doing it twice.
At the end of July Offshoot Investment Research’s Eric Nickolaison did a sum-of-the-parts valuation of Disney stock for Seeking Alpha.
Nickolaison gave Disney’s media networks which include ESPN, the Disney Channels’, and ABC, a fair value of $41 per share or about 42% of its Disney’s Sept. 28 share price of $98.05.
The media business generates about 43% of Disney’s overall revenue and 45% of its EBITDA. Nickolaison points out that $41 per share is a conservative valuation of the media networks given the affiliate fees ESPN continues to bring in despite viewer attrition. So, there could be as much as $10 per share in additional value. We’ll revisit this $10 at the end.
Plenty of people have suggested spinning off ESPN to extract the hidden value that a sports cable network would garner as a pure play. Heck, I recommended ESPN’s IPO back in November 2012. You would have got higher valuation five years ago.
Nickolaison doesn’t think it’s a good idea because ESPN is the cash cow that allows Disney to acquire other businesses such as Marvel and Lucas Films. While that’s true, there’s no reason why it can’t sell off 30% of ESPN to the public while maintaining control.
I recommended ESPN be spun off so that it could take greater chances on sports programming, etc. while forcing the remaining Disney businesses to maximize their potential. I still see it that way.
Disney gets a lot from ESPN but does ESPN get a lot from Disney?
The Rest of the Parts
While the studio entertainment segment is the sexiest of the three remaining operating segments, the parks and resorts business are the most consistent. Factor in the trend toward experiential travel and entertainment and you’ve got a real moneymaker.
Nickolaison values this part of its business between $48-$54 per share or 13.5-15 times EBITDA. Currently, investors value Vail Resorts, Inc. (NYSE:MTN) at 16 times EBITDA and while it is the biggest operator of ski resorts in North America, it’s no Disney despite having similar EBITDA margins.
Therefore, I don’t think it’s a stretch to say Disney’s parks and resorts, in the right scenario, could be worth almost $60 per share.
Add in $25 per share for the studio entertainment, $18 for the consumer products and interactive media and the additional $10 for the media networks I mentioned above, and the intrinsic value of DIS stock comes to $154. Subtract $11 per share in net debt and that leaves us at $143 per share, 46% higher than where it’s currently trading and 17% greater than Nickolaison’s estimated fair value.
Bottom Line on DIS Stock Price
There’s no question that Disney is going through a transition at the moment as it tries to find the right balance with all of its operating segments while also figuring out a plan of succession for CEO Bob Iger.
Disney’s current cash return [Free cash flow plus net interest expense divided by enterprise value] is 5.3%. That doesn’t take into account a sum-of-the-parts valuation of Disney’s various businesses.
So, I’m comfortable recommending current shareholders stay the course and potential buyers seriously consider its stock, both now and whenever it falls into the low $90s and high $80s.
Disney’s brand still has meaningful value.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.