hi I'm Jimmy in this video we're looking at Disney's stock ticker symbol DIS our
goal with this video is to try to better understand the basics of Disney's
business and then see if we can come up with a fair value for Disney stock and
hopefully we can use this information to get us closer to our personal goal of
achieving financial freedom okay so let's dive at a Disney's
business so Disney breaks their business into four main segments their largest
segment is parks experiences and products that accounted for about 37% of
revenue in 2019 clearly this segment is where they account for their theme park
revenue plus Disney accounts for cruise lines their National Geographic
experiences and then the products part of this particular segment accounts for
the licensing of their trade names their characters the sale of their branded
merchandise things along those lines so clearly this is a massive part of their
business that frankly this part of their business seems to have a very nice moat
around it there's a there's very few brands around the world then I think
have the clout that Disney has especially in their branded products and
characters okay then their next largest segment is their
media networks which is kind of about 35% of revenue in 2019 Disney media
networks they operate their Disney branded channels like Disney Disney and
Disney Junior things along those lines they also have free form FX National
Geographic they have the ABC television network they own 50% of A&E a few more
brands along those same lines most of the money in this segment is generated
through advertising affiliate fees and the distribution of their content onto
other platforms now one thing that I've always found interesting about Disney as
a business or even as a brand is how interconnected these four segments
really are I have two kids myself and they love Disney they watch Disney
movies they watched the Disney Channel and then they really because of they
watch all of those they really want to go to the Disney theme parks so I've
personally always been impressed with the Disney business model where the
strength of each brand of each business line that they have fuel the other
lines where there's only a few content creators out there that have a decent
moat to their business Disney is one of them because many of
the top Disney movies as an example well those Disney movies turn into theme park
rides and they obviously sell merchandise behind it so I think that
they have a very strong brand and there's something to be said for that
from an investing standpoint so I'm guessing you could tell it I'm a fan of
Disney as a business in general now let's finish running through the rest of
these other two segments and then we'll see if we could value Disney stock okay
so next up we have their studio entertainment business which accounted
for about 16% of revenue from 2019 and this is where their Disney movies are
accounted for from a revenue perspective so things like Marvel Pixar Lucasfilm
and the list goes on and on - the amount of brand or - the amount of movies that
they ultimately create and then this brings us to the direct-to-consumer
business which is it this houses the highly anticipated Disney Plus that's
where Disney Plus now resides in 2019 it's the counter for about thirteen
percent of revenue although this is anticipated to grow quite quickly since
Disney Plus has really pushed out strong they also have ESPN Plus this is also
where they have Hulu which Disney owns about 67 percent of so Disney Plus
launched in November of 2019 in the United States and in four other
countries and they plan on launching in Western Europe I believe in the spring
of 2020 Eastern Europe in late 2020 and then Latin America I believe in 2021 and
I know that they launched in a few Asia's asia-pacific regions they're
trying to launch in a few a few different asia-pacific regions over that
same time period 2020 2021 so far the Disney Plus rollout has been a very
strong move for Disney they had about 10 million people sign up on the first day
and I heard that after the first three months or so there are almost 30 million
people that had signed up and this is impressive growth and frankly it's been
causing quite a stir when it comes to their stock so this is Disney's
historical pressed earnings ratio going back the past few
years and as we could see there was a huge spike in their price to earnings
ratio recently now this bike is how much investors are willing to pay for each
dollar of earnings per share so in theory if it's trading in a 30 times P
multiple that means you're willing to pay 30 dollars for one dollar of
earnings now one of the reasons that investors are willing to pay more now is
partially because of the growth that they're showing Disney Plus is bringing
in a new line of business and a new line of growth and naturally many people are
willing to pay more money for more growth this is logical this is expected
the second thing is that earnings per share is actually pulled back over the
past year as Disney has finished up the merger with 21st Century Fox and then
they launched Disney Plus clue there's going to be costs associated with that
so in doing that earnings per share over the past year have fallen and many
investors are willing to sit and wait for Disney stock for the long run there
are many long-term investors in this type of investment so the fact that
earnings pull back over the past year maybe next year is somewhat expecting
they're willing to do that if they expect the pace to continue on the
future years now for me I personally prefer to use a discounted cash flow
valuation method this is what that valuation method looked like and if it
cures how to perform this type of analysis actually did a whole video on
how to work through this I've got an Excel template that I built I've got
links in the description to a blow to that video so I'm not going to really go
through it here but basically what I did is I took analyst estimates for future
free cash flow and I discounted that by a required rate of return of eight and a
half percent that's been about what I've been using lately eight and a half
percent now I know that this number can be a very subjective number basically
the required rate of return says that how much do I need for this return how
much of an have returned do I need on an annual basis for this investment to make
sense if you want less of a return you'd be willing to pay a higher price for
this stock higher return you willing to pay a lower price okay simple enough
then I use the perpetual growth rate of two and a half percent this is typically
what I like to use I'm a big fan of two and
percent here because we're the perpetual growth rate is also somewhat subjective
it's not nearly as subjective as the required rate of returns I use two and a
half percent because in theory this is the expected growth rate of GDP so I
assume that at some point beyond the initial growth period Disney will grow
at two and a half percent forever and they could maintain that pace assuming
they just kept up with what GDP was growing yet now let's imagine that we
thought that Disney would could grow it five percent forever we used five
percent of perpetual growth rate well that seems a bit unrealistic do we still
think GDP is only gonna grow at two or three percent if that's true
essentially what we're saying is that Disney would eventually become larger
than the United States because at some point if one is growing at five percent
forever the other ones growing at two and a half
percent forever some point the five percent one's going to be bigger and
that might be a bit unrealistic although I do love Disney so maybe but still
being more realistic either way that math gives us an estimated fair value of
the company of about one hundred eighty five billion dollar one hundred eighty
five billion dollars divide that by shares outstanding we get a fair value
of about a hundred and two dollars per share
now given that Disney stock is currently trading at about hundred and forty
dollars per share well clearly according to this valuation method Disney stock
seems overpriced today now actually did a video on Disney towards the end of
2018 and when I did this is the result of that DCF calculation so at that time
for the required rate of return I used a weight a weighted average cost
of capital that's what wax stands for and for that
I actually used a nine percent required rate of return and because I used a
higher number well that would in theory lower the fair value of the stock but
the key difference that I want to point out here between this valuation and the
current valuation is these shares outstanding so today there's about three
hundred and some-odd million more shares than there was back at the end of 2018
now look this likely came out of some of the acquisitions that they've done
recently but I was curious if I adjusted the current valuation method
with the old number of shares outstanding well we came up with a fair
value of the stock of about 124 dollars per share so that's not too far off of
my old calculation but still compared to today's price of one hundred and forty
dollars per share well I I would still personally as much of a fan of Disney
stock as I am I'm a big fan of their company in general I'd still like to see
the stock fall a bit more before we jump in for a long term investment now
hypothetically if we are okay if we're gonna hold this stock for the next
thirty years you know a Buffett has said that I'd rather buy a good stock at or
I'd rather buy a great company at a good price than a good company at a great
price so hypothetically if we wanted to account for that to me this is one of
those great companies personally I'll be waiting for this stock to fall a little
bit before I get involved where do we get involved well a lot of that depends
on what fair value we came up with for me I'd like to get it below my
calculation of fair value today and I also wish that Disney paid a bit more of
a dividend than they do right now they have a dividend yield of slightly over
1% and I actually did a video on where I went through with my top five dividend
stocks from their sector they there they list themselves in the communication
services sector and I did a video where I went through my top five stocks
they're not on that list because I had a self-imposed minimum yield of 2 and a of
2 percent and they are slightly over 1% so I I wish it they were paying slightly
more of a dividend beyond that I think it makes sense in my mind to wait for
this one to pull back we might have to wait for a market crash or something
along those lines to get it there but I'm hoping it happens if if it does
happen this is one of the first stocks on going after now if you're curious
what those top 5 dividend stocks are from the communication services sector I
did a video on that there's a link here there's a link in the description below
and I really want to thank you for sticking with me all the way to the
video hopefully you found this interesting thanks and I'll see in the
next video