The Power of Earnings: Disney

Chartists, momentum investors, and palm readers may disagree, but at The Motley Fool we know that a stock is worth only the cash flow its underlying business generates. But as investors, how do we know if we're buying those cash flows on the cheap or if we're paying too much for future expectations?

Try using the earnings power value, a quick way to calculate the value of a company's current earnings. Once we've crunched the numbers, we can then compare the EPV to a company's stock price to determine the value that investors are giving its earnings growth. Then you can make the call if it's worth paying up for that future growth.

If you're new to the EPV way, check out our primer and spreadsheet. Don't worry: You don't need a Ph.D. in finance -- just a few numbers you can easily find at Fool.com. Let's take a quick look at the EPV for Disney (NYSE: DIS  ) .

First: What it does
Disney is an entertainment and media powerhouse whose empire includes TV shows, movies, amusement parks, and resorts. And let's not forget all those toys and treasures you can buy for your kids that are based on hundreds of Disney characters. Even if you're child-free, you're certainly familiar with ABC, ESPN, Pixar, and good old Mickey Mouse. Regardless of your age or family status, these names go hand in hand with superior brands, global recognition, and cash flow.

Second: The value of today's earnings
Using our handy EPV primer from above and a 10% discount rate, we get the following for Disney:

EPV Cash Flow (TTM)

Current Earnings Value per Share

Current Stock Price

Value of Growth per Share

% Growth Implied in Stock Price

$5,114 million

$19.25

$34.60

$15.35

44%

TTM = trailing 12 months.

Third: Is it worth it?
I was a little surprised to see the amount of growth currently priced into Disney's stock price. The company certainly has growth prospects ahead of it, both from an organic standpoint (ESPN) as well as through acquisitions (thank you, Marvel). But its business is very reliant on the consumer and has faced some challenges -- its DVD business and theme parks have struggled. Over the past five years, Disney has grown revenues at only a 3% annual clip. Earnings per share have done somewhat better, posting a five-year annual growth rate of about 9%. Things may be looking up, however. With a rebounding economy, analysts expect 11% earnings growth this year and 16% growth next year.

Fourth: Disney's EPV vs. three competitors
Let's see how Disney stacks up against three other media and entertainment companies. Running these three companies through our EPV calculator gets us:

Company

Current Earnings Value per Share

Current Stock Price

Value of Growth per Share

% Growth Implied in Stock Price

Time Warner (NYSE: TWX  )

$34.20

$32.06

($2.14)

NA

Viacom (NYSE: VIA-B  )

$30.10

$33.20

$3.10

9%

DreamWorks Animation

(NYSE: DWA  )

$14.90

$32.00

$17.10

53%

Interestingly, Time Warner and Viacom have little or no growth built into their stock prices, while Disney and DreamWorks have quite a bit. The next step is to dive into the revenue sources of each company to understand potential market sizes and growth prospects of each segment. Remember, EPV is a handy tool to see what price investors are putting on a company's future. But it's just a starting point. Do you agree? Does Disney's future growth potential justify its stock price? Let us know your opinion by posting down below.

At the time of publication, Ron Gross owned shares of Disney and Time Warner. Ron is advisor of the Motley Fool Million Dollar Portfolio. Walt Disney is a Motley Fool Inside Value recommendation. Walt Disney and DreamWorks Animation SKG are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 07, 2010, at 3:32 PM, esxokm wrote:

    I think Disney is hard to evaluate with this tool. The problem centers on its content businesses -- how does one truly value them? Content is subjective, and the company can have a string of misses as well as a string of hits when it comes to movies and TV shows. A stock like Coca-Cola might be more appropriate for this tool.

    When you think about it, Disney has been recommended many times over the years, and it has been a great trading vehicle. Yet, long-term, its share price and dividend payout has gone essentially nowhere. What is the market telling us? Perhaps it simply isn't confident in Disney's ability to continually generate hits that can be exploited across all of its operations. How else does one explain the current price action and the fact that Disney is looking at some major new releases next summer (Thor, Cars 2, etc.)?

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