St. John’s University Undergraduate
Student Managed Investment Fund
Presents:
Walt Disney Company (DIS)
Analysts:
Joseph Ali
Marco Diaz
Raymi Lopez
Noelle Taddeo
Recommendation: Purchase 100 shares
Share Data: (12/05/14)
Price: $93.76
LTM P/E: 22.01
Beta: 1.091, 10-Year, Adjusted
Shares Outstanding: 1,696 Million
Market Capitalization: $155.38 B
52-week high:$ 93.98
52-week low: $68.80
1
Table of Contents
I.
II.
III.
IV.
V.
VI.
Executive Summary…………………………………………………………………….3
Company Overview……………………………………………………………………..4
A. History…………………………………………………………………………….4
B. Business Segments………………………………………………………….....5
C. Executive Leaders……………………………………………………………....7
Industry Overview……………………………………………………………………….8
Fundamental Analysis………………………………………………………………...11
A. Ratio Analysis……………………………………………………………….....14
B. Earnings Forecast……………………………………………………………..21
C. Relative Valuation……………………………………………………………..25
D. Absolute Valuation…………………………………………………………….28
E. Risk Factors…………………………………………………………………....31
Recommendation……………………………………………………………………...32
References……………………………………………………………………………..33
2
I. Executive Summary
After evaluating Disney, our group believes that it is has many prospects and its stock
price is positioned to grow in the next few years. We recommend buying 100 shares of
Disney stock. After performing the relative and absolute valuation, we have concluded
that Disney is worth more than its current stock price of $91.63. Considering its
acquisitions of various media companies over the years such as Pixar, and more
recently Marvel and the Star Wars franchise from Lucasfilm, Disney is lined up for
blockbuster films for years to come, just as it has performed strongly in this category in
the past. One of its recent films, Frozen, has just reached 5th highest grossing film
status at $1.2 billion.
Due to the potential for many more commercially successful films and its financial
strength compared to its peers, we think that Disney is aligned with the goals of the
Investment Fund. Disney is beyond a household name, captivating generations of
Americans since the early 1900s. It would be a strong addition to the portfolio and
contribute to long term growth.
3
II.
Company Overview
A. History
“The Walt Disney Company, together with its subsidiaries and affiliates, is a leading
diversified international family entertainment and media enterprise with five business segments:
media networks, parks and resorts, studio entertainment, consumer products and interactive
media” (thewaltdisneycompany.com).
The Walt Disney Company was founded on October 16, 1923 by Walt Disney and Roy
O. Disney as the Disney Brothers Cartoon Studio. The Company established itself as a leader in
the American animation industry with iconic characters such as Mickey and Minnie Mouse with
their first appearance in Steamboat Willie in 1928. The Walt Disney Company has grown to
encompass more than just its own brand by diversifying into live-action film production,
television, and theme parks, music, publishing, and online media, and owning and operating the
ABC broadcast television network.
Walt Disney Company Timeline:
1955: Disneyland opened the first Disney Park in Anaheim, CA to an invited audience.
In the fall of 1971, Walt Disney World Resort opened the Magic Kingdom and two hotels near
Orlando, Florida.
In 1975, Walt Disney World Village, a large outdoor mall with Disney-built specialty shops opens
to later become Disney Village Marketplace.
1983: Tokyo Disneyland opens in Japan as the first international Disney Theme Park
1983: Disney Channel begins broadcasting with 18 hours of programming per day
1987: First Disney store opens in Glendale, CA
1989: Hollywood Studios and Pleasure Island open at Walt Disney World Resort
1992: Euro Disneyland opens, the first in europe, later renamed Disneyland Paris
1994: Beauty and the Beast Broadway show opens in NYC.
1994: The Lion King opens
1994: Disney Interactive, intended for creating and selling cartridge games and CD-ROM
software is formed
1995: purchases 25% percent of California Angels baseball team.
1995: Disney Online created to develop online presence
1995: Disney Channel beings operation in the UK
2001: Fox Family Channel acquired, renames ABC Family
2004: acquires the Muppets and Bear in the Big Blue House
2005: Hong Kong Disneyland opens
2005: First to license TV episodes, from ABC and Disney Channel series on iTunes
2006: Pixar Animation Studios acquired
2009: Disney XD, a new cable network, launches
2009: Marvel Entertainment joins Disney family
2011: Disney Dream makes first voyage
4
2011: Officially started construction on Disney Shanghai
2011: Aulani, a Disney Resort & Spa in hawaii opens
2012: Disney Junior television network launches
2012: Disney Fantasy makes its maiden voyage
2012: Acquired Lucasfilm, the company that makes Star Wars.
B. Business Segments
Media
Media Networks comprise a vast array of broadcast, cable, radio, publishing and digital
businesses across two divisions – the Disney/ABC Television Group and ESPN Inc. In addition
to content development and distribution functions, the segment includes supporting
headquarters, communications, digital media, distribution, marketing, research and sales
groups.
The Walt Disney Studio
The Walt Disney Studios has been the foundation on which The Walt Disney Company was
built. Today, the Studio brings quality movies, music and stage plays to consumers throughout
the world. Feature films are released under the following banners: Disney, including Walt Disney
Animation Studios and Pixar Animation Studios; Disneynature; Marvel Studios; Lucasfilm; and
Touchstone Pictures, the banner under which live-action films from DreamWorks Studios are
distributed. The Disney Music Group encompasses the Walt Disney Records and Hollywood
Records labels, as well as Disney Music Publishing. The Disney Theatrical Group produces and
licenses live events, including Disney on Broadway, Disney On Ice and Disney Live!.
Parks, Resorts and Cruises
“At the heart of Walt Disney Parks & Resorts (WDP&R) are five world-class vacation
destinations with 11 theme parks and 44 resorts in North America, Europe and Asia, with a sixth
destination currently under construction in Shanghai. WDP&R also includes the Disney Cruise
Line with its four ships - the Disney Magic, Disney Wonder, Disney Dream and Disney Fantasy;
Disney Vacation Club, with 12 properties and approaching a total of 200,000 member families;
and Adventures by Disney, which provides guided family vacation experiences to destinations
around the globe” (thewaltdisneycompany.com).
Disney Consumer Products
“Disney Consumer Products (DCP) is the business segment of The Walt Disney Company
(NYSE:DIS) and its affiliates that delivers innovative and engaging product experiences across
thousands of categories from toys and apparel to books and fine art. As the world's largest
licensor, DCP inspires the imagination of people around the world by bringing the magic of
Disney into consumers' homes with products they can enjoy year-round. DCP is comprised of
three business units: Licensing, Publishing and Disney Store. The Licensing business is aligned
around five strategic brand priorities: Disney Media, Classics & Entertainment, Disney & Pixar
5
Animation Studios, Disney Princess & Disney Fairies, Lucasfilm and Marvel. Disney Publishing
Worldwide (DPW) is the world's largest publisher of children's books, magazines, and digital
products and also includes an English language learning business, consisting of over 40 Disney
English learning centers across China and a supplemental learning book program. DPW's
growing library of digital products includes best-selling eBook titles and original apps that
leverage Disney content in innovative ways. The Disney Store retail chain operates across
North America, Europe and Japan with more than 350 stores worldwide and is known for
providing consumers with high-quality, unique products” (thewaltdisneycompany.com).
6
C. Executive Leaders
“Robert A. Iger
Chairman and CEO
Prior to his current role, Mr. Iger served as President and Chief Executive Officer
beginning in October 2005 and President and Chief Operating Officer from 2000-2005.
He received a Bachelor of Science degree in Television and Radio from Ithaca College.
Iger is credited for the successful acquisition of Pixar (2006), Marvel (2009), and
Lucasfilm (2012), as well as innovating Disney’s creative content offerings across new
and multiple platforms.
Andy Bird
Chairman, Walt Disney International
Prior to his position as Chairman, Bird worked with Time Warner as president of
TBS International in 2000. Bird’s responsibilities include developing and implementing
strategies to increase Disney brand affinity and awareness in key international markets,
introducing new customers and guests to Disney’s legacy and iconic characters, and
investing in and maximizing opportunities in emerging markets. He has, successfully
acquired UTV, launched Dlife, and reorganized Disney’s international structure.
Alan Braverman
Senior Executive Vice President, General Counsel and Secretary
Since 2003, Braverman has served as the chief legal officer of the company and
oversees its team of attorneys responsible for all aspects of Disney’s legal affairs.
Previously, Braverman was executive vice president and general counsel, ABC, Inc.
and deputy general counsel, The Walt Disney Company. He received his B.A. degree
from Brandeis University in 1969 and his J.D. degree from Duquesne University in
1975.
Ronald L. Iden
Senior Vice President, Global Security
Iden joined Disney after working with the Federal Bureau of Investigation and the
California Office of Homeland Security. In his current role, he is responsible for
developing and coordinating Disney’s security efforts worldwide. He received his B.A.
degree from the University of Illinois and a Master’s degree from the Illinois Institute of
Technology.
7
Kevin Mayer
Executive Vice President, Corporate Strategy and Business Development
Prior to his current role, Mayer was a partner and head of the Global Media and
Entertainment practice for L.E.K. Consulting LLC. Presently, he is responsible for
targeting emerging businesses, Managing cross-divisional issues and opportunities, and
executing all mergers, acquisitions, and divestiture transactions. Mayer received his
M.B.A. from Harvard University in 1990, and holds a M.S.E.E. from San Diego State
University and a B.S.M.E. from Massachusetts Institute of Technology”
(thewaltdisneycompany.com).
III.
Industry Overview
Disney is difficult to categorize because it is involved in many different industries
but it is best described as a diversified international family entertainment and media
conglomerate. This includes 21st Century Fox, Viacom and the other companies that
produce and develop movies and TV shows and other types of media and are the ones
we chose to compare Disney to for our relative valuation and margin comparative
analysis. However Disney also has quite a presence in the theme park and resorts
industry, with a Disneyland in France, China and their own cruise line.
To compare all aspects of Disney, we chose other media enterprises such as
21st Century Fox, Viacom, CBS, Time Warner Inc and Six Flags Entertainment.
Although Disney is best described as a media conglomerate, to account for its other
divisions we compared them across three different industries in total:
Media Conglomerates, with an industry total revenue of $141,142.44 million in 2014
Hotels/Resorts/Cruise lines, with an industry total revenue of $76,349.21 million;
Movies & Entertainment, with an industry total revenue of $38,196.22 million.
8
Below is the 2009-13 historical performance and forward looking outlook for Media
Conglomerates, with quite optimistic prospects for 2015 and 2016.
And below is the same historical performance and outlook for Movies/ Entertainment
and Hotels/Resorts, respectively. Both of these show results and prospects which are
akin to the Media Conglomerates outlook:
9
Lastly, the chart below is a breakdown of each segment of Disney as a part of total
revenue. As the chart shows, the bulk of their revenue comes from their media
networks, followed by their parks and resorts:
10
IV.
Fundamental Analysis
To get an idea of where Disney is compared to it’s peers, we chose Time Warner Inc,
21st Century Fox, CBS Corp, Viacom and Six Flags Entertainment as a benchmark for
comparison. Because its media represent the bulk of its sales, we chose various media
companies with Six Flags to compare the parks and resorts side of things.
A. Ratio Analysis
1) Growth Rates
Sales Growth
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
Total
Revenue
DIS
30869
32132
35156
36237
36990
36289
39040
40956
42840
45993
49326
Avg
Annual
Growth
20042014
2009-2014
4.80%
3.12%
FOX
21898
24498
26738
30554
32719
30926
33082
34152
34333
25338
31913
3.84%
0.31%
TWX
42089
42401
43690
46482
26516
25785
26888
28974
28729
29795
27428
-4.19%
0.62%
CBS
22526
14113
14320
14073
13950
13015
14060
14245
14089
15284
13854
-4.74%
0.63%
VIA
8132
9610
11467
13423
14625
13619
13165
15038
13249
13677
14057
5.63%
0.32%
SIX
998.59
956.76
945.67
972.78
1,021.30
912.86
975.89
1,013.17
1,070.33
1,109.93
1157.1
1.48%
2.40%
Industry
Total
126512.59
123710.76 132316.67 141741.78 125821.3 120546.86 127210.89 134378.17 134310.33 131196.93
137735.1
0.85%
1.34%
In the last 10 years, Viacom comes in first in sales growth, with Disney in second,
followed by 21st Century Fox and Six Flags. Time Warner and CBS have actually had
negative growth. Since the recession however, Disney comes in first, followed by Six
flags and the rest having somewhat anemic growth. This can be attributed to Disney’s
aggressive acquisitions in the last few years, including Marvel entertainment and Pixar.
11
EBIT
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Avg
Annual
Growth
EBIT ($$$)
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
20042014
2009-2014
DIS
4057
4094
6033
7098
6497
6034
7130
7975
9011 10151
11890
12.15%
8.52%
FOX
3278
3772
3935
4922
4687
3561
4620
5401
5698
4819
5998
8.13%
1.81%
TWX
6714
6967
7830
8729
4536
4972
5533
5955
6245
6989
6272
2.35%
7.15%
CBS
5084
2626
2707
2622
2159
1244
1896
2575
3013
3262
3030
-21.23%
19.82%
VIA
2283
2366
2772
3013
2977
2997
3247
3830
3682
4092
4179
6.58%
4.29%
91.72 76.38
161.6
4
67.82
134.9 153.96
204.5 288.4
6
9
261.5
-5.46%
-8.50%
Industry
19999. 23,368. 26460 21017 18,875 22,560 25,889 27853 29601 31630.
Total 21568.79
87
72
.38
.64
.82
.90
.96
.56
.49
5
11.53%
6.60%
SIX
152.79 174.87
EBIT is all profits before deducting interest payments and income taxes. This is a good
way to level the playing field when comparing companies that might have different tax
structures. In this case we see that Disney is performing strong compared to its peers,
leading in 10 year average growth and losing only to CBS in the last 5 years, but only
because CBS took a huge hit between 2008-9 and has recovered somewhat. In
absolute terms, Disney has the highest EBIT at $11890 million, more than double since
2004.
12
Cash Flow Operations
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Avg
Annual
Growth
Cash
Flow Ops
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
20042014
20092014
DIS
4528
4692
5995
5544
5046
5717
6782
7609
7376
9520
10776
9.06%
6.54%
FOX
2849
2852
3501
4144
2791
3207
3943
4414
4165
2579
3662
2.54%
1.34%
TWX
6618
4877
8598
8475
3902
3385
3314
3448
3442
3714
3396
-6.45%
0.03%
CBS
3641
3537
1888
2185
2147
939
1735
1749
1815
1873
1276
-9.95%
3.11%
VIA
1990
1636
2270
1776
2036
1551
1860
2558
2440
2807
3113
4.58%
7.22%
SIX
33.2
121.41
9.8
-37.5 66.93
77.76
64.89 274.94
399.2 28.23%
17.77%
371.6 368.6
3
8
Industry
17715.4 22,26 22086. 15988 14,876 17,698 20,052 19609 20861 22622.
Total 19659.2
1 1.80
5
.93
.76
.89
.94
.63
.68
2
1.41%
4.28%
Cash flow from operations refers to the amount of cash a company generates from the
revenues it brings in, excluding long term investment on capital items or financial
investments. Here we see similar performance to above, with Disney more than
doubling its cash flows and barely falling between 2007-2009. Today all of its
competitors are barely generating as much cash flow as they did before the recession.
Viacom is ahead of Disney in average growth of the last five years, followed by CBS.
Six Flags has had the highest growth as an average in absolute terms its total cash
flows are dwarfed by the other companies.
13
2) Margin and Ratio Analysis. Note: For all ratios to come, ‘2014” is LTM
September 2014.
EBIT Margin
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DIS 13.143 12.741 17.161 19.588 17.564 16.628 18.263
19.472 21.034
22.071
41.293
FOX 14.969 15.397 14.717 16.109 14.325 11.515 13.965
15.815 16.596
19.019
17.285
TWX 15.952 16.431 17.922 18.779 17.107 19.283 20.578
20.553 21.738
23.457
23.779
CBS 22.571 18.608 18.905
9.56 13.485
18.077 21.385
21.343
21.822
VIA 28.071 24.625 24.173 22.448 20.356 22.006 24.664
25.469 27.791
29.919
29.928
SIX 15.301 18.277
15.195 19.112
25.992
22.647
19.10 21.276
23.634
26.126
EBIT
Margin
Industry
Avg 18.335
17.68
9.699
18.62 15.479
7.851 15.827
17.10 17.233 16.776
7.43 13.823
14.40
17.46
EBIT margin is the amount of a sales dollar left over after paying fixed and variable
operating costs. An increasing margin can give a pretty good idea of how good a
company is at lowering costs. As the margin increases, more revenue is available for
expansion or other activities. Disney is leading the pack once again in terms in
improvement over the last ten years, from 13% to over 40%. Its closest competitor
today is Viacom at 29.9%, but this is only a 1% improvement over ten years. The other
companies have also marginally improved their margin, and CBS has actually seen a
decline.
14
Net Profit Margin
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Net
Profit
Margin DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DEC
DIS
7.71
FOX
8.377
TWX
7.624
CBS -66.854
8.029 12.348 11.654 10.873
9.76 11.979 10.882
6.009 11.611
-59.24
9.657
6.234
15.367
9.464
9.871 11.645
15.613
12.422
7.877
9.54
9.909 10.446
11.874
14.585
8.746 -83.678
1.74
5.151
9.063 11.598
12.255
10.095
8.431 11.682 11.196 14.078 16.809
18.14
17.355
10.632
10.722
13.808
13.424
SIX -17.401 -11.359 -21.887 -25.091
-5.539
-6.354 10.829
14.337
8.715 -14.493
VIA 15.746 13.569 13.695 12.145
Industry
Avg -7.466
9.11 11.324 12.133 13.072
-9.524
4.508 -15.791
-26.4
60.43 -2.355 32.395
2.473 17.851
8.783 15.994
Net Profit Margin is the company’s bottom line; how much are they taking away after all
expenses and deductions. This a measure of how much of each sales dollar is left after all
expenses. Currently Viacom is in first place, but down from last year and only up 2% since
2004, after taking a large decline in 2008. But not as bad as Time Warner, CBS and Six Flags,
who lost profitability that year. Fortunately, Disney also declined but recovered fast and has
been making steady gains since. Also note that Disney has the most sales in dollars, making
these gains even more impressive.
ROE
ROE
2004
DIS
2005
9.45
2006
9.983 15.005
2007
2008
2009
13.43 12.761
2010
9.606
2011
2012
2013
2014
11.952 13.241 14.309 15.453
16.598
12.085 12.288
14.38 17.275
24.253
FOX
7.232
9.24
10.59
9.978 -7.595 15.086
TWX
5.494
4.048
8.085
6.813 -7.623
5.368
7.735
9.129 10.031 11.837
15.018
CBS
-28.622
-26.225
6.111
5.471 77.642
2.571
7.688 13.088 16.242 18.564
16.480
VIA
9.957
14.739 21.002 22.836 17.435
20.22
16.219 24.214 29.343 41.464
53.680
-- 421.939 -2.933 41.884 18.648
32.635
SIX
-12.631
Industry
Avg
-1.52
-10.438 25.268 70.378
0.225
--
5.921 -1.975 12.533
10.57
79.603 11.504 21.031
20.54
26.444
15
For every dollar invested in Disney by the shareholders, they generated 16 cents in the
LTM Sept 2014 period. This is the return on equity invested, or ROE. Although
Disney’s ROE has improved over the last 10 years, it is on the lower end of the scale as
of today and lags behind the industry average. In this regard Viacom, Fox and Six
Flags lead, Viacom having an especially good year returning over 50%.
ROA
ROA
DIS
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
4.45
4.729
7.572 6.824
6.3
4.926
6.304
6.862
7.248
8.051 9.069
FOX
3.478
4.414
5.589 5.192
-3.49
6.297
5.549
5.78
6.518
6.819 7.539
TWX
2.573
1.989
3.826 2.943
-2.994
2.171
3.71
4.123
4.265
5.031 6.395
3.196 2.933 -34.681
0.841
2.727
4.933
6.206
7.088 5.743
7.676
7.2
6.953
6.553
9.34
-3.954 -2.866 -5.797
-7.96
CBS -19.081 -15.06
VIA
SIX
Industry
Avg
6.353
-1.03
7.025
0.039
3.677 2.855
5.282
9.942 11.107 10.19
-3.255 -8.116 20.909 -0.887 12.156
4.167 4.473
-5.473
7.044 7.235
2.179
7.625
5.025
7.722
Return on Assets is the measure of how good a company is at using its assets to
generate earnings. Arguably Disney’s greatest assets are intangibles such as the
brands it owns and such, and in this category we see them make steady improvements
as they buy up and acquire brands such as Pixar and Marvel, although they are not far
ahead of the industry average. Its closest competition in this regard is Viacom, the
brand giant owning everything from MTV to BET. The other companies are a point or
two below and have negative returns in 2008, with only Disney and Viacom holding up
that year.
16
Asset Turnover
Asset
Turnover 2004 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
DIS 0.577
0.589
0.613
0.586
0.579
0.541
0.557
0.566
0.554
0.562
0.59
FOX 0.415
0.452
0.467
0.477
0.549
0.582
0.586
0.586
0.56
0.437
0.607
TWX 0.337
0.331
0.329
0.338
0.207
0.276
0.389
0.416
0.408
0.424
0.438
CBS 0.285
0.254
0.331
0.335
0.414
0.483
0.53
0.544
0.535
0.578
0.569
VIA 0.403
0.518
0.561
0.593
0.626
0.595
0.585
0.836
0.879
1.344
0.587
SIX 0.227
0.252
0.264
0.317
0.342
0.307
0.346
0.377
0.375
0.392
0.417
Industry
Avg 0.374
0.399
0.428
0.441
0.453
0.464
0.499
0.554
0.552
0.623
0.535
This ratio is a measure of asset use efficiency. The higher the ratio, the more revenue
the company is generating per dollar of assets. As of 2014, Fox is the most efficient,
although most of the companies have been making strides in this regard. Disney has
fluctuated between .541-.590, but is still quite competitive today, and has always stayed
above the industry average.
Inventory Turnover
This is an efficiency ratio that shows how quickly a company moves its inventory (sells
its products) over a given time period, in this case annually. A low inventory turnover
suggests poor sales or too much inventory. Fortunately, Disney does not seem to suffer
from either, with a ratio consistently leading the industry.
17
Financial Leverage
Financial
Leverage 2004
DIS
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2.11
2.12
1.88
2.07
1.99
1.92
1.88
1.98
1.97
1.88
1.87
FOX
2.29
1.94
1.86
1.98
2.51
2.3
2.07
2.18
2.23
3.02
3.36
TWX
2.1
2.01
2.25
2.37
2.86
2.07
2.1
2.34
2.37
2.34
2.5
CBS
1.62
1.98
1.85
1.88
3.13
2.99
2.66
2.64
2.59
2.65
3.12
VIA
1.82
2.45
3.04
3.3
3.3
2.59
2.37
2.86
3.06
4.74
6.22
SIX
3.71
4.05
5.52
89.24
-21.43
-4.98
3.16
3.47
3.43
6.99
7.88
Industry
Avg
2.28
2.43
2.73
16.81
-1.27
1.15
2.37
2.58
2.61
3.60
4.16
Financial leverage is the degree to which a company uses borrowing of all kinds for
financing. A high degree of financial leverage can mean high interest payments that
ultimately hurt the company's bottom line and earnings. It can also increase the
volatility of a company’s stock price. Disney has improved this ratio over time and is
quite ahead of the rest, Six Flags and Viacom being very high.
Long Term Debt to Equity
This is a financial ratio showing the relative proportion of shareholder’s equity and debt
used to finance a company’s assets. A high ratio means a company has been using
debt to finance its growth, which can result in volatile earnings due to high interest
expenses. Fortunately, Disney’s LTM September ratio is far lower than all of its
competitors, with similar historical results.
18
TIE
TIE (times interest earned) is the ratio of EBIT of a firm to its interest expense during a
given period. It measures a company’s ability to cover its interest payments from debt,
with a higher value meaning a greater ability to do so. Disney excels in this category as
well, managing a TIE ratio of double the industry average since 2006, and making large
strides since.
Current Ratio
This is a liquidity ratio that measures a company’s ability to pay short term obligations
with its short term assets; the amount of current assets per $1 of current liabilities. A
ratio under 1 suggests the company would not be able to pay its obligations if they
came due. Fortunately, Disney’s is adequate as of LTM September 2014 but is still low
compared to its peers. However we do not view this as an issue as Disney has very
easy access to financing due to their Debt to Equity ratio.
19
Quick Ratio
This is another liquidity ratio that gauges how well the firm can pay short term
obligations with its most liquid assets (cash, short-term investments, and accounts
receivable). Disney’s quick ratio is quite low, but again is a minor issue because of its
access to financing.
Du Pont Analysis
Du Pont analysis is useful for dissecting ROE and determining how a firm can maximize
its value. Here we see an increasing ROE over the last 3 fiscal years (ended
September), where financial leverage stayed about the same, and asset turnover up
just a slight increase. This illustrates that the increasing ROE can be attributed to high
profit margins.
Dupont Analysis
2012
2013
2014
Net Profit Margin
13.440
13.623
15.367
Asset Turnover
0.575
0.577
0.590
Financial Leverage
1.906
1.833
1.830
ROE
14.731
14.406
16.598
20
B. Earnings Forecast
Income Statement
1. Total Revenue (2015)
The total revenue for Disney in 2014 is $48,813.00M. The total revenue
forecasted for Disney for 2015 is $52,498.91M. This number was conceived by
estimating segmented market shares for 2015. We used corresponding industry growth
estimates as benchmarks to calculate previous market shares:
146187.19
81494.73
42307.87
0.155
Industry Total Revenue (Media Conglomerates)Forecast
Industry Total Revenue (Hotels/Resorts/Cruiselines)
Industry Total Revenue (Movies Entertainment)
Disney as a % of Industry Total Revenue (Media Market Share)
0.267 Disney as a % of Industry Total Revenue (Hotels/Resorts/Cruiselines Market Share)
0.191
Disney as % of Industry Total Revenue (Studio Entertainment Market Share)
$52,498.91
Disney Forecasted Total Revenues
Then we identified trends to determine a market share for 2015. To be
conservative we used the same market shares as the previous year for 2015, except for
the media segment which we added 50bps since on average for the past 5 years the
media market share for Disney has been growing by roughly 50bps. The market share
for Disney was 14.6% for media in 2013, in 2014 it was 15%, and in 2015 we estimated
its share of revenue to go to 15.5%. The market share for Disney was 26.8% for parks,
resorts, and hotels for 2013, in 2014 it was 26.7%, we left it the same for 2015 at
26.7%. The market share for Disney was 16.4% for studio entertainment in 2013, in
2014 it was 19.1%, for 2015 we estimated that conservatively it would remain the same
at 19.1%.
2. Cost of Goods Sold
We noticed a trend in (COGS excluding Depreciation and Amortization) as a
percent of sales. It was consistently decreasing. It was 82% of revenue in 2004 and in
2014, it was 71% of revenue. We believe that this shows the company is becoming
more efficient at managing its cost of goods as time goes on. Ultimately, we used an
average of the last two years to be conservative which resulted in 72755. We took that
21
percentage and multiplied by the forecasted 2015 revenue which gave us $38,195.81M
as our estimate for COGS excluding D+A.
3. Depreciation
We looked at depreciation as a percentage of gross prior year PP&E. In the last
few years, it had held constant at ~4.6% (4.5433%, 4.6376%, and 4.6031% for the
years 2012, 2013, and 2014, respectively). We expect no reason that this will change in
the future, therefore, we kept the 4.6%. To get the depreciation estimate, we took 4.6%
and multiplied by prior year (Sep. 2014) gross PP&E of $47,054M, thus producing
$2,164.48M in estimated depreciation for FY2015.
4. Interest Expense
The interest expense forecasted is the gross interest expense for 2015 minus the
interest capitalized which turns out to be 346.26M.
5. Gross Interest Expense
We took all the bonds that mature after September 2014 and calculated the
interest payments that Disney would have to make. The interest payments total is
$422.27M.
6. Interest Capitalized
In the most recent years (2012-2014), interest capitalized has fluctuated between
16.3% and 19.9%, the latter representing the most recent of the portions. Because of
this, we decided to take an average to be conservative. The average was 18.0%. We
multiplied the 18% by the gross interest expense of $422.27M to get $76.01M.
7. Unusual Expense
We found this value to be mostly immaterial, however, we placed $100M
expense as a placeholder for possible restructuring and reorganization charges since
these were significant in fiscal 2013 and 2014.
22
8. Earnings Per Share
Disney had a buyback program in effect in 2014 with which they stated the
intention to repurchase $6-8B of shares. In 2014, they repurchased $6.525B, so we
estimate they will buy back $1.5B in shares in 2015. We took the $1.5B during 2015 and
equally divided it in each quarter, giving $375M/quarter or ~4 million shares/ quarter. If
the quarterly weighted average declines by about the same amount as repurchases,
then by September it will have fallen from 1734 (Sept 2014) to 1734-16=1718 by
September 2015. Applying the 1.014 relationship between annual weighted average
and quarterly weighted average at September 2014, that brings us to 1718*1.014 =
1742 for September 2015. So taking earnings and dividing by the new weighted
average diluted shares, it came out to be $4.39.
The complete income statement forecast is below:
23
24
C. Relative Valuation
Forward P/Es
Company
Foward P/E
2015
DIS
20.16
FOX
21.18
TWX
18.47
CBS
15.68
VIA
12.81
SIX
32.78
S&P Consumer
Discretionary
Industry Avg
16.72
19.69
This table compares the forward P/Es of Disney to it’s major competitors. Disney’s P/E
ratio is quite high compared to the others, Fox being close and Six Flags appearing to
be grossly overvalued. More importantly, Disney is above the average as well and we
believe that to be due to an expectation of future growth prospects and stock price
appreciation.
25
Historical Relative Proportion 20042014
Average
Comparable P/E
DIS/FOX
Median
1.043
0.844
DIS/TWX
1.029
1.067
DIS/CBS
0.774
0.823
DIS/VIA
1.182
1.109
DIS/SIX
2.879
1.059
ETF
0.877
0.982
Industry Avg
0.901
0.910
This table above shows the average relative proportion between Disney and its
competitors in P/E ratios over the last ten years. We used the median as well as the
average to account for an outlier. This chart shows that Disney has traded at a
premium compared to most of its competitors, except for Fox and CBS, as well as the
industry average.
RELATIVE PRICE
Relative Price Using
Median
$94.961
$76.91
TWX
$81.711
$84.78
CBS
$52.166
$55.50
VIA
$65.085
$61.11
SIX
$405.757
$149.28
S&P Consumer
Discretionary
$63.067
$70.60
Industry Avg
$76.242
$77.07
Avg of Price Estimates
119.855
82.178
FOX
These are the price estimates calculated by multiplying the relative P/E’s by Disney’s
26
E(EPS) for 2015. We used the median as well to account for the outlier we
encountered with Six Flags. In our relative valuation of Disney, we calculated a price
relative to each comparable by taking the average relationship between P/E values,
multiplying that times the corresponding forward P/Es, then multiplying that times our
estimated EPS. Once we calculated the relative price for each comparable, we then
took an average, giving us a price of $82.18 with a significant outlier, and a price of
$75.48 without the outlier. This relative valuation model concludes an overvalued price
as of 12/05/2014 ($93.76).
Relative Valuation Recommendation: Do not Buy
27
D. Absolute Valuation
We calculated a discount rate, k, to calculate the PV of the dividend cashflows.
We used the Capital Asset Pricing Model to come up with a few different k’s by using
different treasury rates from the 10-year T-bond and the 5-year T-bond. We used the
lowest beta, which was a 10 year adjusted of 1.091, and the highest which was a 5-year
raw beta of 1.193, then used two market risk premiums of 7.168% and an 8.4% risk
premium.
CAPM
Risk free rate: 2.24 and 2.92
Beta: 1.091 and 1.193
Risk Premium: 7.168% and 8.4%
The 7.168 premium is calculated from Bloomberg and the 8.4% is the historical
average of the premium from 1986-2013. We calculated K’s ranging from 10.66% to
12.94%. Then, we took the average of all of those K’s and came out with ~11.5 %
average, which is what we used as a discount rate. We double checked the yield to
maturity on bonds outstanding by Disney over 10 years, and the 18 year bond had a
yield of 3.74, which was much lower than our K.
We then collected EPS and DPS numbers for the last 11 years (2004-2014) and
then calculated the CAGR of Disney’s dividends per share from 2004-2014, 2007-2014,
and from 2009 to 2014. There had been a significant change in the latest CAGR, but
since we are unaware of any circumstances that would significantly affect any future
growth rates, we cannot justify changing it.
average annual growth 04-14
16.963%
average annual growth 07-14
18.523%
average annual growth 09-14
26.860%
28
Scenario 1
2015
2016
2017
2018
2019
2020
PV of Cashflows using k=10
$1.22
$1.30
$1.38
$1.47
$1.56
$1.66
=
$8.60
PV of Cashflows using k=11
$1.21
$1.28
$1.35
$1.42
$1.49
$1.57
=
$8.32
PV of Cashflows using
k=11.5
$1.21
$1.27
$1.33
$1.39
$1.46
$1.53
=
$8.18
We did not use the historical payout since if we did, our forecasted dividend for
2015 would be the same as last year 2014 (which is highly unlikely given Disney’s
dividend history). Instead, we decided to override it with the CAGR of dividend growth
from 04-14, which was 16.963%. Once we did this, we were able to get a dividend
stream for the years up to 2020, shown in the table above. This is for scenario 1, which
assumes Disney would keep its momentum. The table below is scenario 2 which
accounts for a slowdown due to a possible downturn in the business cycle.
Scenario 2
PV of Cashflows using k=10
$1.05
$1.11
$1.18
$1.26
$1.34
$1.42
=
$7.36
PV of Cashflows using k=11
$1.04
$1.09
$1.15
$1.21
$1.28
$1.35
=
$7.12
PV of Cashflows using
k=11.5
$1.03
$1.08
$1.14
$1.19
$1.25
$1.31
=
$7.00
At this point, we had to come up with a measure of “terminal value.” The two
tables below show our calculations for 9 estimates of cash flows by growing the 2020
dividend separately by 1% to 9% in 1% intervals. We did a separate valuation assuming
each of those growth rates. We did it in conjunction with 3 different discount rates,
whereas 11.5 was the highest, thus necessitating the highest growth and giving us the
most conservative price estimate with a specified growth. We were able to determine
that since the growth rate (the one that corresponds to the k=11.5%) which makes the
stock fairly-valued now is 9.5386% and is lower than the lowest actual average growth
rate we calculated (04-14, 16.96%), and MUCH lower than Disney's most recent actual
growth rate we calculated ('09-'14, 26.86%), this suggests that growth for this company
will probably be higher than 9.5386% for the post 2020 period, thus making Disney an
attractive investment.
29
Growth
E(DPS)
2021
Valuation
K=11.5%
IV2015
growth 2
IV stage 1
growth
IV of
both
1.00%
297.38%
28.32
$14.74
$8.18
$22.92
2.00%
300.32%
31.61
$16.45
$8.18
$24.64
3.00%
303.27%
35.68
$18.57
$8.18
$26.75
4.00%
306.21%
40.83
$21.25
$8.18
$29.43
5.00%
309.16%
47.56
$24.75
$8.18
$32.94
6.00%
312.10%
56.75
$29.53
$8.18
$37.72
7.00%
315.05%
70.01
$36.43
$8.18
$44.62
8.00%
317.99%
90.85
$47.28
$8.18
$55.47
9.49%
322.38%
160.35
$83.45
$8.18
$91.63
E(DPS) 2021 Valuation K=11.5% IV2015 growth 2 IV stage 1 growth
IV of both
Growth
1.00%
2.54
24.23622987
$12.61
$7.00
$19.62
2.00%
2.57
27.05263386
$14.08
$7.00
$21.08
3.00%
2.60
30.53172114
$15.89
$7.00
$22.89
4.00%
2.62
34.93856504
$18.18
$7.00
$25.19
5.00%
2.65
40.7013609
$21.18
$7.00
$28.19
6.00%
2.67
48.55971889
$25.27
$7.00
$32.28
7.00%
2.70
59.91068043
$31.18
$7.00
$38.18
8.22%
2.73
83.09255046
$43.24
$7.00
$50.25
9.84%
2.77
166.7089313
$86.76
$7.00
$93.76
Absolute Valuation Recommendation: BUY
30
E. Risk Factors
1. Liquidity Risk
This involves the ability to maintain liquidity, which includes the ability to pay off
expenses and debts. In this regard, Disney is not in the best shape as it has a
substantial amount of bonds issued, some due as far as 2030, but its current ratio is at
a 1.14 as of this fiscal year, which is sufficient to pay its obligations if the time came and
is not far behind its competitors.
2. Credit Risk
This is the risk of loss or nonpayment from a debtor or anyone that owes them
money. Disney has moderate to low credit risk, stating on their 10-k that they generally
do not enter into transactions with any parties with a credit rating of less than A- and
they limit the amount of credit exposure with any one institution.
3. Market Risk
This is the exposure the company has to changes in the market value of its
financial assets. The first is trading risk, which Disney has a moderate amount of as its
largest portion of investments is dedicated to stocks, with a 31-60% range. It has then
allocated a 20-40% portion to fixed income investments such as bonds, and a 10%
portion dedicated to real estate, commodities, and venture capital. Some of their
agreements also allow options and futures, but the bulk of their investments is
diversified in corporate and government bonds and equities.
Non trading risk comes from the completion of Disney’s services to its customers
and its daily and long term execution of business practices. Disney does not have
above average risk in this regard, although this can change if assets and liabilities are
re priced.
4. Operational Risk
Operational risk is the danger of loss resulting from external occurrences such as
improper systems and processes, human error, and foreign culture and regulation. This
can occur in several ways, such as errors, business interruptions, fraudulent acts like
hacking, and employee behavior. Disney generally does not have a lot of exposure to
this as the bulk of their revenues comes from movie productions, but they are exposing
themselves to more of this kind of risk as they continue to build more Disneyland
31
locations around the world and expand their cruise lines. But overall they have a solid
record of service in their locations, with Disneyworld in Florida and Disneyland in
California being icons for generations of Americans and visited constantly to this day.
Recommendation
As a result of our analysis, our recommendation is to buy 100 shares of Disney.
Based on the valuation models and ratio analysis it seems that Disney is well-positioned
to grow significantly through their license acquisitions and expanding parks and resorts.
We believe Disney will be beneficial to the portfolio.
32
References
Disney SEC Form 10-K and all charts retrieved from Factset
Business Executives retrieved from http://thewaltdisneycompany.com/aboutdisney/leadership
33