The Walt Disney Company is surging today on the news on the reinstatement of former CEO Bob Iger. Its shares are now trading at $97.75 after marking a 6.5% change. DIS is still -22.59% below its average analyst target price of $126.27, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Walt Disney has underperfomed the S&P 500 by 25.1%, moving -40.5%.
The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company is in the communication services sector, which includes primarily companies with a cyclical profile whose share price is correlated with macro economic cycles. The exception is large telecom companies, which are more defensive in nature since their share prices have a looser correlation with recessions.
Walt Disney's trailing 12 month P/E ratio is 55.5, based on its trailing Eps of $1.76. The company has a forward P/E ratio of 18.2 according to its forward Eps of $5.36 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the communication services sector has an average P/E ratio of 18.65, and the average for the S&P 500 is 15.97.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Walt Disney's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.87. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing DIS's growth potential .
To better understand the strength of Walt Disney's business, we can analyze its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
DIS's gross profit margins have averaged 28.4% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -30.5%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Walt Disney Company (The)'s last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-10-01 | 6,010,000,000.0 | -4,943,000,000.0 | 1,067,000,000.0 | -46.35 |
| 2021-10-02 | 5,567,000,000.0 | -3,578,000,000.0 | 1,989,000,000.0 | -44.69 |
| 2020-10-03 | 7,618,000,000.0 | -4,022,000,000.0 | 3,596,000,000.0 | 107.86 |
| 2019-09-28 | 6,606,000,000.0 | -4,876,000,000.0 | 1,730,000,000.0 | n/a |
- Average free cash flow: $2,095,500,000.00
- Average free cash flown growth rate: 5.6 %
- Coefficient of variability (the lower the better): 51.2 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, DIS is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Walt Disney has a P/B ratio of 1.8. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Communication Services sector, which stood at 2.62 as of the third quarter of 2022.
Walt Disney is by most measures fairly valued because it has an inflated P/E ratio, a lower P/B ratio than the sector average, and an irregular stream of positive cash flows with an upwards trend. The stock has mixed growth indicators because although it has a a PEG ratio of less than 1, its margins are highly variable and shrinking.
