The Walt Disney Company (DIS)
Background
On October 16, 1923, The Walt Disney Company was founded as a joint venture between
Walt Disney and his brother, Roy.1 In 1928, Disney finally began to shine as the release of
Mickie Mouse was an instant hit for Disney. Even today, Mickie Mouse is a huge part of
Disney’s brand. Mickie has stood the test of time and can still be seen on TV today. In the
1930’s, Disney made the hit movie, “Snow White and the Seven Dwarves.” At the time, the was
the highest grossing movie of all time. Then, Disney took a downturn in WWII since all movies
were stopped and Disney helped the government with war propaganda. In 1955, Disney’s first
theme park Disneyland opened in California. This was an instant hit and the company still
thrived after Walt’s death in 1966. In 2005, Bob Iger became CEO and he started a massive
change in Disney. Iger led the acquisition of Pixar, Marvel Entertainment, and many more.
These moves by Iger have changed the game for Disney. This is how Disney became one of the
largest entertainment conglomerates in the world. Since 2018, Disney has categorized its
business into four segments: Direct-to-Consumer and International; the combined Parks,
Experiences and Consumer Products; Media Networks; and Studio Entertainment.2

Direct to Consumer and International
1
https://www.lifewire.com/the-walt-disney-company-140911
2
https://thewaltdisneycompany.com/walt-disney-company-announces-strategic-reorganization/
This segment is comprised of Disney’s new streaming service Disney+, recently acquired
streaming service Hulu and, and ESPN+ streaming service. Disney+ will focus on family
friendly content from Marvel, Pixar, Lucasfilm, National Geographic, and Fox Studios. Hulu
will act as a general content streaming provider that will go head to head with Netflix and
Amazon Prime in the streaming war. Hulu will focus on Disney’s adult-oriented content like
shows from ABC Studios and FX Networks. ESPN+ will focus on live sports like the newly
acquired 5-year streaming rights for UFC fights. Disney has decided to separate the three instead
of having them on one single platform as a three-pronged strategy to entice streamers who might
only want one out of the three. However, Disney is offering a bundle of all three for a
discounted price. Whether this is an effective strategy or not, time will tell. This segment posted
an operating loss in 2019, however it is the fastest growing segment in terms of revenue as
revenue grew 173.8% during 2019.

Parks, Experiences and Consumer Products
The new Parks, Experiences and Consumer Products segment will be the union of Disney’s
stores, Walt Disney Parks and Resorts, and Disney’s licensing business. This union will provide
consumers with branded experiences. Walt Disney’s travel and leisure business includes six
resort destinations in the U.S., Europe, and Asia. In 2018, the company’s theme parks hosted
157.3 million guests, far surpassing their closest theme park competitors.3 This segment
generates the most revenue, while the Media Networks segments produces the most profits.
Revenue mostly comes from theme park admissions, food, beverages, and vacation stays. This
segment makes up nearly 40% of operating income for Disney.

3
Media Networks
https://en.wikipedia.org/wiki/The_Walt_Disney_Company
The Disney Media Networks include Disney, ABC Television Group, ESPN, Freeform, FX,
National Geographic, etc. The segment’s revenue comes from advertising, affiliate fees as
well as licensing fees. This segment comprises of 44% of operating income for Disney.

Studio Entertainment
The Studio Entertainment segment is engaged in motion picture production and distribution
through 21st Century Fox, Marvel, Lucasfilm, Pixar, and others. Revenue mainly comes
from licensing motion pictures to theaters, sales of DVD’s, and licensing fees. The studio
entertainment sector had revenues of $11.1 billion, around 16% of total revenue and
operating income.
Industry Outlook
Disney’s businesses span different industries including video streaming, media networks,
as well as the amusement park industry.
The video streaming market size was estimated to be $38.56 billion in 2018 and to reach
$149.34 billion by 2026, this is a CAGR of 18.3%.4 The reason for this large growth is rising
technological advancements in mobile phones and tablets that have allowed for online viewing
of video. This is allowing consumers to access video content anywhere in the world, not just in
their living room. Another tailwind for growth of the video streaming industry is the rise is high
speed internet. 4G and LTE have been a key driver in the acceptance of streaming as users don’t
need to have a WiFi connection to watch their favorite content.
4
https://www.grandviewresearch.com/industry-analysis/video-streaming-market
In the video streaming market, there are three segments; internet protocol TV, over the
top (OTT), and pay-TV. Over the top and pay-TV have similar business models that attract
consumers to pay for television content. However, the delivery method is different as OTT
content can be delivered over the public internet while pay-TV needs a coaxial cable or satellite
dish. The OTT market is dominated by the likes of Netflix, Amazon Prime, Hulu, and Disney+.
In the OTT market, some providers bring in revenue by including ads while others shun ads for a
pure subscription model. Internet protocol TV is the delivery of normal TV content over the
internet. This can be delivered through live television, catch-up TV, and video on demand.
These are all competitors fighting for consumers who are “cutting the cord” and switching to
streaming options.
Disney also operates in the media networks sector which has seen slow growth due to a
decline in cable TV subscriptions. However, this has been partly offset by the increase in
advertising revenue, as the cost to advertise has had a CAGR of 2.6% for the last 5 years.
Disney owns a variety of media networks like the Disney Channel, ABC Television Group,
ESPN, Freeform, FX, National Geographic. These networks still make a majority of their money
from the traditional ad revenue from cable subscribers. ESPN is still the dominant name in all of
sports and advertisers will pay top dollar for people watching live television, and sports is one of
the last remaining genres where people will still tune in to watch live entertainment. However,
the outlook is bleak for media networks. Studies have shown that 30% of millennials have
decided to “cut the cord,” compared to only 16% of baby boomers.5
5
https://capitolcommunicator.com/what-cord-cutting-millennials-are-watching/
The global amusement parks market size was valued at $45.2 billion in 2017. It is likely
to expand at a CAGR of 5.8% from 2018 to 2025.6 As well, Disney has the advantage that their
rides are themed with their famous Disney characters. Disney is constantly updating its park to
involve ita most recent star characters in the park. No other amusement park in the world can
attract customers of all ages to their park with characters from their favorite Disney and Marvel
movies.
Competition
The main competitors to Disney (DIS) are Comcast (CMCSA), AT&T (T), and recently
(NFLX). The media industry has seen a massive restructuring in the last 10 years with
companies consolidating to cut costs as new consumers are no longer subscribing to cable TV
and are looking to cheaper options like streaming services. As well, consumers can now
subscribe to a few of their favorite TV Channels with TV streaming options, some of the most
popular being YouTube TV, Sling TV, and AT&T Watch TV.
Comcast (CMCSA) is the owner of NBC, CNBC, MSNBC, as well as Universal Parks
and Resorts. This is a main competitor to Disney’s ABC and Disney’s theme parks. NBC is also
coming out with a new streaming service, Peacock, that will have a free element with ads. This
is a direct threat to Disney’s new service Disney+. The companies are very similar, but most
agree that the leadership of Disney makes Disney the best company in the sector. However, all
could change now that Iger is out as CEO.
6
https://www.grandviewresearch.com/industry-analysis/amusement-parks-market
AT&T is also a main competitor as they own Time Warner, DC Films (the main
competitor to Marvel), and CNN. Although, AT&T does not run a theme park and they run a
phone company as their main business. As well, AT&T has been plagued with one of the worst
acquisitions of all time of DirecTV. Since the acquisition, DirecTV has lost 15% of its subscriber
base as subscribers were footing the bill for its horrible mega mergers.7
One of the newest competitors is Netflix as Disney has recently jumped into streaming
heavily with its acquisition of Hulu and the creation of Disney+. However, their strategies are
completely different. For Disney, Disney+ and Hulu are just the parts of a business that help
exposure for their larger brand. For Netflix, streaming is the entire model. They are relying
completely on the streaming model to survive even with every entertainment company coming
out with their own service.
Competitive Advantage
Unlike a lot of conglomerates like GE, Kraft, and Time Warner; Disney finds a way to
unify their portfolio of companies into a unified corporate strategy that allows the individual
companies to succeed. For example, take the movie Frozen. Frozen was made by Walt Disney
Animation Studios. With a budget of $150 million Frozen (1) brought in $1.28 billion
worldwide in gross box sales. Estimates are that the film alone made a profit of $400 million.8
However, this was not the end for Disney. A portion of Epcot in Disney World is being rebuilt
7
https://www.fiercevideo.com/operators/at-t-lost-1-16-million-video-subscribers-q4
8
https://en.wikipedia.org/wiki/Frozen_(franchise)
as “Frozen Ever After.”9 This addition will bring in new visitors to Disney Parks, Experiences
and Consumer Products segment Disney World. Also, merchandise of Frozen characters can be
found at any Disney store around the world. Lastly, for those who did not get the chance to
watch Frozen on the big screen can now watch Frozen on Disney’s Direct to consumer segment
Disney+. While other conglomerates rely on superior stock picking to generate high returns,
Disney can get away with misfiring on an acquisition and still get a high return as they integrate
their businesses well and the businesses they acquire perform better simply because they are
under the umbrella of Disney. Companies that try to mass acquire companies like GE fail to
produce excess return because expanding into healthcare or television did not help its core
businesses grow or produce any synergies.
Recent News
The most recent news for Disney is that their new streaming service has become an
instant success in terms of new subscribers. The latest numbers are that Disney+ now has over
50 million subscribers.10 This has beaten all analysts’ predictions in terms of subscriber growth
in such a short period. However, some are curious as to how long this can be maintained as the
Disney+ library is relatively short compared to the giant Netflix. Although, sometimes less is
more. There is still a question as to whether this number includes some who may be on a free
trial or those who may have the service through a promotion with Verizon.
9
https://www.forbes.com/sites/kenfavaro/2015/08/04/why-long-term-investors-can-bet-ondisney/#5ca93d4e3d03
10
https://www.barrons.com/articles/disney-subscribers-number-might-not-be-as-good-as-it-looks-51586543374
In other news, Disney’s CEO Bob Iger has stepped down as CEO. As of now, he is
officially the chairman of the board, but there is speculation that he is acting as CEO for now due
to the unexpected COVID-19 crisis. When all is over, Bob Chapek will be the CEO of Disney.
Iger’s leaving is a huge loss for Disney as he was one of the most respected CEO’s in the United
States and led Disney to the successful acquisitions of Lucasfilm and 20th Century Fox as well as
many others. Without these acquisitions, Disney would not be who they are. Bob Chapek has
been in the company for over 20 years and has run the parks segment, one of Disney’s most
profitable segment.
Finally, more news is coming out about the effects COVID-19 will have on Disney. The
whole company will be affected by the changes. While there a silver lining, most of the news is
bad. For instance, all of Disney’s parks and resorts will be closed indefinitely. This will be one
of the last places to reopen as Disney’s parks gather huge crowds and would likely be a massive
spreader of a virus. This will hurt Disney’s revenue for at least the next two years and possibly
longer as consumer preferences may be permanently changing due to COVID-19. As well, the
media networks segment has seen a significant decline in ad revenue coming in because a lot of
the regular advertisers are now shut down. There is no need to advertise for commercial airliners
or resorts because all of these places will be closed. As well, a lot of companies are cutting ad
budgets to try to cut costs in replace for lost revenue. Another segment that has been impacted is
the studio entertainment segment. All films across the world have stopped filming as they are an
at-risk group as there is a lot of people in a group and there is no way to work from home. This
will lead to costly setbacks and delay’s in movies and shows that were supposed to come out this
year and next year. The silver lining is that the direct to consumer segment has seen massive
growth due to millions of families on lockdown with nothing to do. In the most recent earnings
call, Netflix beat new subscribers by more than double analysts’ expectations. It is likely we will
see the same things for Disney+ and Hulu.
Fundamental Analysis
Ratio Analysis
Disney has very strong fundamentals when looking at their ratios. They have
consistently been growing their revenue year over year due to the acquisition of companies and
still have managed to generate positive cash flow every year. This is a sign of a mature and
strong company that has a great brand and can incorporate any new company that comes under
the umbrella. Disney has also been growing its operating margin consistently. This shows that
Disney is investing in profitable projects that are maximizing shareholder value. While
operating margin was down significantly in 2019, this was largely due to the acquisition costs of
20th Century Fox. As well, Disney has paid a small but consistent dividend to shareholders.
Disney has kept the payout ratio at around 23%. Even if all goes wrong, this is a small payout
ratio so the dividend should be sustainable.
In terms of financial health, Disney’s debt/equity ratio is .42. This is very strong
compared to the market and industry average. This means that Disney has a strong balance sheet
and is not too leveraged and can survive a downturn in revenue.
When looking at the Dupont analysis for Disney, Disney has a strong net profit margin and total
asset turnover, which acts as a boost to ROE. However, its minimal leverage is a depressant to
the ROE. However, an ROE of around 16.71% beats the communications sector average ROE of
around 7.5%
Technical Analysis
2 year price chart:
The surge in 2019 price was due to Disney’s acquisition of Fox assets and taking control
of Hulu which will dramatically increase the revenue base. The sell off in early 2020 is
obviously due to the loss in revenue from the impact of COVID-19.
5 year price chart:
Analyst Recommendations
Analysts are mostly bullish on Disney (DIS) as Disney exceeded expectations with their
rollout of Disney+. Estimates are that Disney got 10 million subscribers within the first 48
hours.11 Analysts believe Disney+ has comparative advantages to Netflix in content creation
because it already has years of classic Disney owned movies and shows. As well, with the
acquisition of 21st Century Fox, Disney will own the creative rights to a host of new characters
which will be the catalyst for a plethora of blockbuster hits.
The main analysts who are bulls on the stock say:

“Although making movies is a hit-or-miss business, Disney’s large library of content with
popular franchises and characters reduces this volatility over time.”

“Disney has mastered the process of monetizing its world-renowned characters and franchises
across multiple platforms.”12
The main analysts who are bearish on the stock say:

“The business model for media networks depends on continued growth of retransmission and
reverse compensation fees. Any slowdown in the growth of these fees, perhaps because the
pay-television business begins to shrink, would hurt the profitability of this segment.”

“Increases in the cost of popular programming such as sports events and television series could
adversely affect margins at ESPN and ABC.”
Intrinsic Value Calculation
11
https://markets.businessinsider.com/news/stocks/disney-stock-price-target-raised-new-highdisney-plus-forecast-2019-11-1028701703
12
https://www.morningstar.com/stocks/xnys/dis/quote
The intrinsic value for Disney was calculated using an average of many methods. When
looking at Morningstar’s fair value, they give Disney a fair value of $130. This is after
considering Disney’s impacts from COVID-19. This metric shows Disney is trading at a large
discount to intrinsic value. When looking at NASDAQ’s fair value, they found a fair value of
$129.29. This was very similar to the fair value of Morningstar. When looking at the justified
P/E method I got a justified P/E of 18.4x. With an EPS of $4.72, this gives a fair value of
$86.74. This is a significant premium to the current price but is most likely due to the depressed
EPS of Disney in 2019 due to acquisition costs. Next, the DDM model was excluded because
Disney’s payout ratio is not high enough to justify its use. Next, the EDM average was $175.31.
When taking the average of these four models, we get an intrinsic value of $130.33. This means
the stock is currently trading at a 30% discount to intrinsic value.
Recommendation
Since Disney is trading at a 30% discount to intrinsic value, we recommend that all of the
current shares we have now should be held. In addition, we believe that the portfolio should buy
limit orders for stock at around $90 as we see more volatility ahead in the markets. While the
market is pricing in a quick V-shaped recovery we do not believe this is realistic. In light of this
view, in the short term, we believe Disney could have a lot more downside risk as their parks
segment could see a larger than expected decrease, even a permanent decrease in visitors every
year.