The Walt Disney Company's (DIS) hit movie “Lilo & Stitch” made box office highs on Memorial Day weekend. So, is DIS stock a buy here? Yes - a quick look at its strong free cash flow profile and revenue forecasts shows it could be 24% or so undervalued, worth over $139 per share.

DIS is at $112.54 in midday trading on Tuesday, May 27. That is well up from recent lows but only slightly lower than 6-month highs.

On May 26, Rotten Tomatoes reported that Lilo & Stitch “Roars to Highest Memorial Day Weekend Ever.” It is estimated to have grossed $183 million for the long weekend, beating out Paramount's “Mission: Impossible” film.

That implies Disney's cash flow strength seen last quarter could continue this quarter and the fiscal year ending Sept. 2025. This article will look at this.

Free Cash Flow Estimates

On May 7, Disney reported that its fiscal Q2 ended March 29, revenue was up 7% YoY, and it generated 15% higher operating income.

More importantly, its free cash flow (FCF) and FCF margins (i.e., FCF/revenue) surged, as seen in the table below (taken from page 3 of its quarterly earnings release).

This shows that FCF was up over double in the quarter, and its FCF margins almost doubled to 20.7%. Moreover, for the past 6 months, it converted 11.65% of revenue into free cash flow.

We can use that to estimate its FCF going forward.

For example, analysts now expect revenue for this FY ending Sept. 30, 2025, will rise by 2.8% from $92.5 billion last year to $95.11 billion.  In addition, forecasts for the next fiscal year are for +5.1% higher revenue of $99.98 billion (almost $100 billion). If it keeps generating hits like Lilo & Stitch, that could happen.

That implies that Disney will be on a next 12-month (NTM) run rate revenue of about $97.5 billion. So, if the company can keep generating an FCF margin between 12% and 20% (average of 16%) over that period, here is the FCF forecast:

   $97.5 billion x 16% FCF margin = $15.6 billion FCF

As a result, DIS stock could be worth significantly more. Let's estimate its price target.

Target Price for DIS Stock

For example, using a 5.0% FCF yield metric (i.e., which assumes that 100% of FCF is paid out to shareholders and the market gives the stock a 5% dividend yield), DIS stock is worth much more than its price today. Let's see how that works.

This means that we take the FCF estimate and divide it by 5% (which is the same as multiplying by the reciprocal, or 20x):

   $15.6 b FCF x 20 = $312 billion market cap

That is 54% higher than today's market cap of $202 billion. In other words, DIS stock is worth 54% more or 

  $112.54 x 1.54 = $173 per share

However, just to be conservative, let's scale back our parameters. Let's assume that FCF margins stay low at 12.5% and the company generates lower FCF:

  0.125 x $97.5 billion NTM revenue = $12.19 billion FCF

Next, using a lower FCF multiple of just 18.2 times (i.e., a FCF yield of 5.50%):

  $12.19b FCF x 18.2 = $221.9 billion mkt cap

That is just 10% higher than today's $202 billion market valuation. It means the target price would be $123.79 per share.

Expected Return. So, on average, that implies that Disney's valuation could range between $222 billion and $312 billion, or $124 to $173 p/sh (i.e., an average of $148.50).

However, the expected return might be lower if we weight the lower target price higher. For example, let's say there is a 2/3rds likelihood DIS stock is worth $123 vs. a 1/3rd chance it's worth $173:

  $123 x 0.667 = $82.04 +

  $173 x 0.333 = $57.61 =

   Target Price = $139.65

  Expected Return = $139.65 / $112.54 -1 = 1.24 -1 = +24%

Summary 

So, assuming Disney generates FCF margins this year and next of between 12% and 20% and weighting that possibility heavier on the lower side, an investor can expect around a 24% return investing in DIS stock today at over $139 per share

Analysts tend to agree with this target price. For example, Yahoo! Finance reports that 31 analysts have an average price of $123.90. Similarly, Barchart's mean survey is for 125.73.

AnaChart.com, which tracks recent analyst recommendations, shows that the average of 27 analysts is $129.41 per share. That is +15% higher than today's price.

The bottom line here is that DIS still looks undervalued, using a FCF and FCF margin analysis, a FCY yield valuation metric, expected return analysis, and also analysts' price targets.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.