How Disney's (NYSE:DIS) Cash Flows might be Undervalued

October 08, 2021
  •  Updated
December 10, 2021
Source: Shutterstock

The Walt Disney Company ( NYSE:DIS ) has grown an amazing 41% in the last 12 months, mostly on the rise of the streaming business with Disney+ subscriptions. Today, we are going to see if the stock has matured its potential by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this.

We generally believe that a company's value is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model .

Crunching the numbers

We use a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows.

Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value.

10-year free cash flow (FCF) forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF ($, Millions) US$5.83b US$8.71b US$11.8b US$15.5b US$18.2b US$20.6b US$22.7b US$24.3b US$25.8b US$27.0b
Growth Rate Estimate Source Analyst x13 Analyst x11 Analyst x5 Analyst x3 Est @ 17.92% Est @ 13.13% Est @ 9.78% Est @ 7.43% Est @ 5.79% Est @ 4.64%
Present Value ($, Millions) Discounted @ 6.7% US$5.5k US$7.7k US$9.7k US$12.0k US$13.2k US$14.0k US$14.4k US$14.5k US$14.4k US$14.1k

("Est" = FCF growth rate estimated by Simply Wall St)

In the end, we sum the present value of the cash flows in the next 10 years.

See our latest analysis for Walt Disney

Present Value of 10-year Cash Flow (PVCF) = US$120b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten-year period.

We discount the terminal cash flows to today's value at a cost of equity of 6.7%.

Terminal Value (TV) = FCF 2031 × (1 + g) ÷ (r – g) = US$27b× (1 + 2.0%) ÷ (6.7%– 2.0%) = US$585b

Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = US$585b÷ ( 1 + 6.7%) 10 = US$307b

Our result is the total value, or equity value. Which is then the sum of the present value of the future cash flows. For Disney, we come up with an equity value of US$426b today.

Compared to the current share price of US$178, the company appears a touch undervalued at a 24% discount to where the stock price trades currently.

NYSE:DIS Discounted Cash Flow October 8th 2021

The model attempts to value the future cash flows of Disney, while not perfect, it shows that the company has plenty of future potential. It is now up to the leadership to deliver on the execution and pushing interesting ideas.

The company has yet to show the full capacity of a re-opening play. The main hope is that Disney captures a significant market share of the entertainment screen time, which used to be dominated by the cable and TV companies.

The theme parks are also an asset which is expected to be revitalized during the next few years and provide a strong foundation for future cash flows.

Key Takeaways

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead, the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued.

It is fairly possible the Disney has plenty of value to unlock, and our model suggests that the stock is 23% undervalued.

The next few years will be crucial for the execution and positioning against competitors in the streaming landscape. That is why, while the value potential is there, it is tied to the execution form management and the emergence of a market leader among competitors.

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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