Should You Be Tempted To Buy The Walt Disney Company (NYSE:DIS) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between The Walt Disney Company (NYSE:DIS)’s fundamentals and stock market performance.
The Walt Disney Company (NYSE:DIS) trades with a trailing P/E of 13.9x, which is lower than the industry average of 15.5x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Walt Disney
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for DIS
Price-Earnings Ratio = Price per share ÷ Earnings per share
DIS Price-Earnings Ratio = $104.45 ÷ $7.506 = 13.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as DIS, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 13.9x, DIS’s P/E is lower than its industry peers (15.5x). This implies that investors are undervaluing each dollar of DIS’s earnings. As such, our analysis shows that DIS represents an under-priced stock.
A few caveats
Before you jump to the conclusion that DIS is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to DIS, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with DIS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing DIS to are fairly valued by the market. If this does not hold, there is a possibility that DIS’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on DIS, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for DIS’s future growth? Take a look at our free research report of analyst consensus for DIS’s outlook.
Past Track Record: Has DIS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of DIS’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
