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Disney: A magical company, but is it a magical investment?

Tuesday, March 8th, 2016

Disney is one of my all-time favorite companies. They build awesome theme parks, produce great movies, and not to mention own ESPN for the sports aficionado.

The recently released Star Wars movie was a blockbuster, grossing $1 billion in 12 days and is 1 of only 3 movies to gross over $2 billion. Disney also recently released the movie, Zootopia, which edged out Frozen as the company’s highest grossing opening weekend for any animated movie.

Everyone knows Disney is a great company, but let’s take a deeper look at the numbers to see if it is a great investment.

They have a current P/E ratio of 18.38, which is below the industry average of 26.01. Price/sales is 2.96, also above the industry average of 2.15.

Price/book value is 3.81, while price/tangible book value is 59.38. A wide spread between these two measurements tells me the company has a lot of intangible assets, which doesn’t come as a major surprise since Mickey Mouse is the quintessential example of one. While he represents value for the company, it is hard to determine the exact dollar amount of Mickey as a company asset. We typically avoid companies with a high amount of intangible assets. 

Revenue is up 8.86% over the last twelve months, which outpaces the industry average of 6.06%. EPS grew at a rate of 18.98%, while the industry fell by 5.43%. It’s great to see the company grow earnings at a faster rate than sales, and in a time period where competitors saw earnings fall. HHHowever it is important to understand why this occurred, and if the growth is sustainable going forward.

Looking at the liquidity for Disney they have a current ratio of 0.95, which is below the industry average of 1.17. We typically like to see companies with a current ratio over 1. We prefer a company to at a minimum, have the same amount of current assets as current liabilities on their balance sheet. Debt/Equity of 43% is well below the industry of 172.44% which is a major positive.

Understanding management effectiveness by checking a company’s return on capital (ROC) and return on equity (ROE) is a must before investing into a company. Typically, we like to find companies with ROC above 10 and ROE above 15. Over the last 12 months Disney produced a ROC of 14.24 and a ROE of 20.61. These are both positives as it shows management is doing a great job returning money to its stakeholders.

Disney does an outstanding job generating income from their sales. They have a profit margin of 17.52%, which is more than double the industry average of 8.26%. It is encouraging to find companies that can increase their revenue while maintaining strong profit margins.

Collecting receivables and managing inventory are two major keys to running an efficient business. Disney produces a receivable turnover of 5.75, which is below the industry average of 8.71. Inventory turnover comes in very strong at 20.16, above the industry average of 16.6.

It is refreshing to find companies with high inventory turnover, as it is costly for inventory to sit in the warehouse and as time progresses that inventory becomes less valuable.

With a current price of $99.39, Disney is nearly 23% off of its 52-week high set back in August 2015. Looking on a forward basis and going out to September 2017, Disney is expected to have EPS on a GAAP basis of $6.28. Applying the forty-year average of the forward P/E of 16.5 to the EPS, we arrive at a target sell price of $103.62. The minimal estimated return on Disney tells us the company is currently fairly valued.

While Disney is a great company with a great product, we would rather find another company that is currently undervalued.

Do you have a question or a company you would like us to take a look at?
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