- Continuation of "Disney Stock Valuation Part 1: Valuing Disney's Media Business".
- A deeper "sum-of-the-parts" dive into Disney's four segments: Parks & Resorts, Studio Entertainment, Consumer Products and Interactive.
- Further proof that a break-up analysis of Disney reviews 39% upside potential from its current stock price.
PART 1 BRIEF SUMMARY: Disney's Sum Of The Parts Analysis -39% Upside
The first part of this series introduced my thesis and summarized my arguments for this opportunity. It also estimated Walt Disney's (NYSE:DIS) 2017 fair value and EPS per segment as shown in the reference table below. Furthermore, Disney's Media Networks was broken down and its value estimated.
REFERENCE TABLE: Table showing each of Disney segments 5-year average revenue growth, % contribution to sales, estimated 2017 EPS)
This series (Part 2) continues to break-down Disney's segments; providing value estimates for each segment and explaining where the opportunity exists and how you can profit from this opportunity .
PARKS AND RESORTS - Accounts for 31% of Total Revenue (TR)
Parks and Resorts was the second fastest growing segment for Disney in FY2015. The segment owns the Walt Disney World Resort in Florida; the Disneyland Resort in California; Aulani, a Disney Resort & Spa in Hawaii; the Disney Vacation Club; the Disney Cruise Line; and Adventures by Disney.
Fair value estimates
Going back to the "Reference" table above, the estimated EPS for Parks and Resorts is $1.80. Capitalizing that at 15.74x, 14.63x and 27.53x, you get values of $28.33, $26.33 and $49.55 respectively.
On another note, the Parks and Resorts segment is bigger than public traded competitors such as Six Flags (NYSE:SIX), SeaWorld Entertainment (NYSE:SEAS) and Cedar Fair (NYSE:FUN). For example, in FY2015 Disney's Parks & Resorts reported annual revenues of $16.16 billion, 92.18% higher than $1.26 billion by Six Flags, 91.5% higher than $1.37 billion by SeaWorld, and 92.4% higher than $1.24 billion by Cedar.
Hidden asset - a real estate empire
By October 1965, Disney planners acquired 27,443 acres of land in central Florida. But in its 2015 annual report, the company acknowledges only 25,000 acres of land for its Disney World Resort in Florida. In its 2015 annual report, Disney values its land at $1.25 billion. Disney has a real estate empire. Disney land in Florida alone is more than the size of Manhattan (21,500) or ~17% the size of San Francisco (148,400 acres).
Diverse revenue streams
Disney's Parks and Resorts generates revenues from the sale of admissions to theme parks, sales of food, beverage and merchandise, charges for room nights at hotels, sales of cruise and other vacation packages and rentals of vacation club properties.
Another important point to note is that these Parks and Resorts are built to last. Their revenue-generating ability is not capped. Making them an excellent and reliable cash generating machine for years to come.
Segment risk assessment
Disney faces stiff competition on many fronts. The effect of these competitors for Disney is a high fixed cost. Also, the business is seasonal. Peak attendance occurs during school vacations and in early-winter and spring-holiday periods.
Studio Entertainment, Consumer Products & Interactive
I combined the last three segments because any Studio has to have all three segments within it. For example, studios produce content (Studio Entertainment) and then engage with licensees, publishers and retailers to develop, promote and sell that content (Consumer Products). Because of their IP portfolios, these studios then leverage their IP's across interactive media platforms such as games (Interactive).
Past accretive acquisitions
Disney acquired Pixar back in 2006 for $7.4 billion, Marvel Entertainment and its associated comic assets for $4 billion in 2009, Lucasfilm for $4.05 billion in 2012. Adjusting for inflation, Pixar could be worth $8.82 billion, Marvel could be worth $4.48 billion and Lucasfilm could be $4.24 billion. That would be a total of $17.54 billion in acquisitions today.
Fair value estimates
DreamWorks cites three major competitors on its website: Disney Pixar Studios, Fox's Blue Sky Studios, and the Weinstein Company.
DreamWorks forward 2017 P/E is 36.03. Other competitors such as Fox's Blue Sky Studios and Weinstein Company are private companies and Pixar Animation was acquired by Disney back in 2006.
Looking back to the "Reference" table above, the aggregate estimated EPS for the three segments is $1.45. Capitalized at 36.03x, we have a value of $52.24. Before Disney acquired Pixar, Pixar traded at 84x estimated 2007 earnings. But 84x is a very high multiple. Hence, the reason why I did not use that multiple.
Disney faces a lot of litigation costs. The company has to continuously exploit and protect against infringement on its IP portfolio.
Moreover, Disney also faces cyber attack threats. The company holds millions of people's personal information. Any compromise to this information may force the company to incur additional costs, lose potential opportunities and damage its brand as clients start to doubt Disney's security.
Lastly, box office revenues are very volatile. This sales volatility makes it harder to predict how profitable the studio can be down the line. Disney needs to continue creating great content every year just to stay relevant. But the success of that content is dependent on many factors beyond Disney.
Conclusion: Sum-of-the-parts ("SOTP") or Break-Up analysis
I believe that a deeper dive into segments can be done to extract a more precise estimate. Moreover, I used "competitors" and not necessary "comparative" companies.
However, the findings are intriguing. We found that the Media Networks, Parks and Resorts should, at a minimum, trade at $37.01 and $49.55, respectively. Minimum because the individual segments in these major segments imply a much higher valuation. As for the combined value of the Studio Entertainment, Consumer Products and Interactive, the fair value estimate is $52.24. The analysis concludes that there is at-least 39% upside potential to Disney's current stock price (price target of ~$139/share).
Because of so many hidden assets such as land and equipment, the annuity nature of its Parks and Resorts, IP portfolio and catalysts on the horizon, I believe that 39% upside is also way below what should be the fair value. This is why I feel confident about it.
Activities such as spin-off, split-off, tracking stock, or an equity ("IPO") carve-out could unleash tremendous value for Disney. These restructuring suggestions are unlikely to be near-term outcomes but they are meant to give a picture of what each segment could be worth as a standalone company.
In addition, Disney is often wrongly classified. Disney is not one industry. Hence, because analysts need to assign an industry to facilitate Comparable Company Analysis, Precedent Transactions and DCF calculations, Disney's stock price has gotten low multiples because of being assigned to low growth industries.
Lastly, Disney's management is shareholder friendly. Growing dividends by an average of 27% y/y since 2006. Considering that the stock is way below its high's, down 15% in the last 12-months and worth a lot using an SOTP or "Break-up" analysis, this is a great opportunity to buy a superior business at undemanding valuations.