Executive Summary Disney is a household and worldwide name that loyal customers trust. The company is known for the grand theme parks countrywide and their timeless movies across generations. Disney is a trusted company and fantasy for over 50 years. In this valuation’s entirety we determine whether Disney is fairly valued, undervalued or overvalued by defining its intrinsic value. Before doing so we will compare their financials over the past three years as well as to the industry as whole. We will determine the firm’s riskiness, beta and dividend growth which will then lead to the main portion of our analysis: the intrinsic stock price. Once the intrinsic stock price is valued throughout thorough calculations, we will recommend whether Disney is a valuable company to invest in. We hope you stay along for the ride! Disney and Competitors Overview The Walt Disney Company is part of the Broadcasting and Media Industry. The company was started in 1923 by Walt Disney with their first short film Alice’s Wonderland.1 They have since expanded to become a diversified entertainment company that operates in five business segments with are Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive; with operations now spanning North America, Europe, Asia Pacific and Latin America. Their biggest competitors in the United States include NBCUniversal Media, DIRECTV Holdings, and CBS Corporation. Disney is the largest of the three with $42.278 billion in revenue in 2012. NBCUniversal Media comes in second with $23.812 billion, DIRECTV Holdings is close with $21,872 million and CBS Corporation rounds out the top four with $14.089 million in revenue2. The Walt Disney Company. (2013) Disney History. Web. 14 Nov. 2013. Retreived from http://thewaltdisneycompany.com/about­disney/disney­history 2
OneSource Information Services, Inc. (2013). Television Broadcasting. Retreived from http://0­globalbb.onesource.com.library.simmons.edu/Web/Reports/ReportMain.aspx?KeyID=9191&Proc
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1 Industry Overview As an industry Broadcasting and Media is comprised of advertising, publishing, broadcasting & cable TV, and movies & entertainment markets. In 2012 the industry generated $255.1 billion in revenue and grew by 2% but has experienced minimal annual growth since the recession of 2008. Although the growth rate has been low the industry has managed to grow during the recession and has a forecasted compound annual growth rate (CAGR) of 2.3% for the 2012 ­2017 period, compared to the CAGR of 0.4% for the 2008­2012 period. Within the industry the broadcasting and cable TV segment is the most profitable earning about 56% of the overall revenue. The future of the industry is being greatly impacted by technology. Companies have been and need to invest in new technology to be able to serve the consumer in the new and innovated ways that they are looking for. Foreign markets (CAGR: European 2.2% and Asia­Pacific 5.6%) are also expected to grow faster over the next five years creating new opportunity to expand3. Disney’s Strengths Disney has many strengths that can help them grow in the future, the most obvious and enduring is its intrinsic value generated from its strong brand identity. Disney is a huge international company that has raised generations of families. Children today can watch and identify with the same characters (and company that created them) that their grandparents grew up with. Not only have multiple generations grown up with Disney, they also have an idyllic image of the company and prefect to consume their products over others because of it. From a business prospective Disney also has many advantages including the increase in marketing activities. Disney has mastered (and controls) the creating and distributing of content. With an emphasis on kids content Disney is able to produce a product, create OneSource Information Services, Inc. (2013). The Walt Disney Company. Retreived from http://0­globalbb.onesource.com.library.simmons.edu/web/Reports/ReportMainIndustry.aspx? 3
2 buzz, and cross markets through it many channels of distribution. This leads into another one of Disney’s strengths: its diverse business operations. Owning many different kinds of content producers and distributors allows Disney to not only cross market and share content it also allows it mitigate market fluctuations in any of its given operations4. In 2009 Disney bought Marvel Entertainment for $4 Billion. This has given them the rights to many beloved comic books that has lead to new movie franchises with the possibility of incorporating the comics into theme parks. With these rights Disney has many opportunities to grow in a large comic industry.5 Disneys Opportunities With the advertising market growing domestically and abroad, Disney has a huge opportunity because in TV and media the main source of revenue is advertising. Disney’s broadcasting and cable TV segment accounts for more than half of their overall revenue. This means that Disney should be able to take advantage of the growing advertising market, which will affect its largest operation. Another opportunity is the expanding entertainment and media industry. Disney already has a large presence in the industry that is expected to grow at a compound annual growth rate of 5.7% internationally. Disney has also strategically acquired related businesses that complement their existing segments. By acquiring these companies Disney has created opportunities but also taken away competition in the process6. Disney’s Challenges While Disney is doing well on many levels there are some challenges to be aware of. The OneSource Information Services, Inc. (2013). Television Broadcasting. Retreived from http://0­globalbb.onesource.com.library.simmons.edu/Web/Reports/ReportMain.aspx?KeyID=9191&Proc
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CNN Money. (2009). Disney to buy Marvel for $4 billion. Retreived from http://money.cnn.com/2009/08/31/news/companies/disney_marvel/ 4
OneSource Information Services, Inc. (2013). Television Broadcasting. Retreived from http://0­globalbb.onesource.com.library.simmons.edu/Web/Reports/ReportMain.aspx?KeyID=9191&Proc
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3 industry that they operate in is highly competitive and the pressure has only increased with recent and developing technological changes and consumer preferences. Disney’s intellectual property is also vulnerable; they rely on patents, copyrights, trademarks and others to ensure that their content and technical advances are not stolen and replicated. Disney is also subject to many US (FCC) and international regulations on their entertainment networks and programs. Finally Disney has a lot of total and long term debt. This not only could affect its ability to raise additional capital but also ties up a lot of operating cash flow in payment of interest and principal payments. Cash flow then cannot be used for other operations or worse make Disney unable to pay its debt obligations7. Trend Analysis & Benchmark Analysis Liquidity Ratios Current Ratio 2012 2011 2010 Industry Average 1.07 1.14 1.11 1.40 Quick Ratio 0.95 1.01 0.98 1.00 Inventory Turnover
Days Sales Outstanding 63.07 68.45 65.23 50.60 Fixed Assets Turnover 0.69 0.70 0.67 1.51 Total Assets Turnover 0.56 0.57 0.55 0.53 Debt Management Ratios
Total Debt Ratio 0.47 0.48 0.46 2.59 Times Interest Earned 26.09 24.45 17.20 1.22 Profitability Ratios
OneSource Information Services, Inc. (2013). Television Broadcasting. Retreived from http://0­globalbb.onesource.com.library.simmons.edu/Web/Reports/ReportMain.aspx?KeyID=9191&Proc
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4 Return on Total Assets 7.59% 6.66% 5.73% 6.30 Return on Equity 14.29% 12.86% 10.56% 15.10 Market Value Ratios Price/Earnings Ratio 15.18 12.48 17.62 10.9 Liquidity Ratios8 ●
Current Ratio: The Television Broadcasting industry average current ratio was 1.40, while Disney’s current ratios for 2010­2012 were 1.11, 1.14, and 1.07, respectively. Because Disney’s current ratios are lower than the industry average, this means that Disney is worse off in terms of paying off its debt than the industry average. ●
Quick Ratio: The industry average quick ratio was 1.00 for 2012, and the Disney quick ratios for 2010­2012 were .98, 1.01, and .95, respectively. Because Disney’s quick ratios for each year were lower than the industry average, Disney is worse off in terms of paying its immediate debt than the industry on average. Overall, Disney has worse liquidity than the average company in the Television Broadcasting Industry, meaning that it cannot convert its assets into cash as quickly as the average company. Asset Management Ratios9: ●
Days Sales Outstanding: The industry average for days sales outstanding was 50.60, while Disney’s inventory turnover ratios for 2010­2012 were 26.40, 25.64, and 27.51, respectively. Disney’s days sales outstanding ratios are higher than that of the industry, indicating a better inventory turnover than the average company in the industry. ●
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Fixed Asset Turnover: The industry average for fixed asset turnover is 1.50 and the ratios for Exhibit A Exhibit B 5 Disney for 2010­2012 were .67, .70, and .69, respectively. This indicates that Disney receives less income per dollar of fixed assets than that of the average company in the industry, therefore having a worse inventory turnover. ●
Total Assets Turnover: The industry average for total assets turnover was .53, while Disney’s Total Assets Turnover for 2010­2012 were .55, .57, and .56, respectively. This indicates that Disney’s Total Asset Turnover is close to that of the industry, but slightly better. Therefore, Disney earns slightly more income per dollar of fixed assets than the average company in its industry. Overall, Disney has worse asset management than the industry average, meaning that it does not receive as much revenue per dollar in assets as the average company in the industry. Debt Management ●
Total Debt Ratio: The Television Broadcasting Industry average for Total Debt Ratio for 2012 is 2.59, while Disney’s Times Interest Earned for the years 2010­2012 were .47, .48, and .46, respectively. Therefore, Disney is financed more by creditors than the average firms in its industry. ●
Times Interest Earned: The industry average for Times Interest Earned is 6.81, while Disney’s Times Interest Earned for the years 2010­2012 were 17.20, 24.25, and 26.09, respectively. This means that Disney has a better Times Interest Earned than the industry average because they can cover their interest payments many more times with their earnings before interest and tax than the average company in their industry. Overall, Disney has better debt management than the industry average because their times interest earned is much higher during each year from 2010­2012 than the industry average. This indicates that they have low amounts of debt when compared to their overall assets. 6 Profitability Ratios10 ●
Return on Total Assets: The industry average for Return on Total Assets was 6.30% while Disney’s ROA for 2010­2012 was 5.73%, 6.66%, and 7.59%, respectively. This means that Disney is about equal with the industry because it has similar ROAs as the industry, meaning that Disney receives about the same income per dollar of assets than the average company in the industry. ●
Return on Equity: The industry average ROE is 15.10%, while Disney’s ROEs for 2010­2012 were 10.56%, 12.86%, and 14.29%. Disney has a worse ROE than the average company in the industry for the years 2011 and 2012, meaning that its ROE is on worse better than the average company. Overall, Disney has worse profitability than the industry average because its ROA and ROE are slightly worse during the years 2010, 2011, and 2012 than the industry average. This indicates that the company’s assets and equity are not contributing well to their net income. Market Value Ratios11 ●
Price/Earnings Ratio: The average industry Price/Earnings Ratio is 6.10, while Disney’s P/E ratios for 2010 were 17.62, 12.48, and 15.18, respectively. Disney’s P/E ratio is lower than that of the industry average, so they have a worse P/E ratio than the industry. The P/E ratio indicates how much an investor would be willing to pay for one dollar of reported profits. Overall, Disney has a worse market value outlook than the industry average because its Price/Earnings ratio is lower than that of the industry average. Exhibit C Exhibit D 10
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7 Trend Analysis Liquidity Ratios ●
Current Ratio: Disney’s current ratio has varied over the three years. In 2010 Disney had a current ratio of 1.11. This then increased to 1.14 in 2011 and then decreased to 1.07. Overall, Disney’s current ratio has seen a decrease in values over the three years, regardless of the increase in 2011. The overall decrease indicates that Disney had fewer assets than liabilities and had trouble paying off its debt. ●
Quick Ratio: The quick ratio from 2010 to 2012 again had a general decrease. Starting in 2010 the quick ratio was 0.98, moving forward the ratios were 1.01 and 0.95 ending in 2012. With that being said, over the past three years Disney has had difficulty in paying off its immediate debt within its own company. Over the past three years, Disney has had a decreasing trend analysis in regards to liquidity. Their ratios have been declining meaning that Disney has trouble converting their assets to cash from year to year. Asset Management Ratios ●
Inventory Turnover: From the year 2010 to 2012 Disney’s inventory turnovers were 26.40, 25.64 and 27.51. The increasing trend indicates that Disney has been improving with the inventory turnover year to year. ●
Day Sales Outstanding: The Days Sales Outstanding from 2010 to 2012 are 65.23, 68.45 and 63.07. In general, Disney has had a decreasing Day Sales Outstanding, regardless of the spike in 2011, which indicates an improving receivables to sales per day. ●
Fixed Asset Turnover: The Fixed Asset Turnover rates from 2010 to 2012 are 0.67, 0.70 and 0.69. The general increase in fixed asset turnover rates indicates that Disney is improving and 8 receives more income per dollar of fixed assets from year to year. Please note that in 2011 Disney had its highest Fixed Asset Turnover. ●
Total Asset Turnover: Disney’s Total Asset Turnover from 2010­2012 are 0.55, 0.57 and 0.56. This indicates an improving total asset turnover which means that Disney receives more income per dollar of fixed assets over the span of three years. Note that in 2011 they had the highest Total Asset Turnover rate. Over the past three years Disney has been doing well for with their Asset Management. The company is doing well comparative to itself, Disney increases revenue per dollar in assets year to year. Debt Management Ratios ●
Total Debt Ratio: Disney’s total debt ratio from 2010 to 2012 are the following: 0.46, 0.48 and 0.47. This general increase over three years indicates a worsening total debt ratio. Although from 2011 to 2012 their total debt ratio was decreased, the company over a three year time span does have increasing values. This means that Disney is accruing more debt over three years and has trouble paying it off. ●
Times Interest Earned: Disney’s times interest earned values are as follows: 17.20, 24.45 and 26.09. These increasing values indicate that Disney is improving and they can cover their interest payments more with their earnings before interest and tax from year to year. Disney is doing well with Debt Management. They have low amounts of debt in relations to its assets. Both the Total Debt Ratio and times Interest Earned have improving values. Profitability Ratios ●
Profit Margin: Disney’s Profit Margin from 2010­2012 are as follows: 10.41%, 11.76% and 13.44%. Over the three years Disney has been increasing their profit per item sold from year to year. 9 ●
Return on Total Assets (ROA): The values for ROA from 2010­2012 are 5.73%, 6.66% and 7.59%. Overall the company’s ROA has increased over a three year time span, regardless of the significant spike then decline from 2011 to 2012. This indicates that Disney itself has been increasing, receiving more income per dollar of assets over three years. ●
Return on Equity (ROE): The values for ROE from 2010­2012 are 10.56%, 12.86% and 14.29%. These increasing values means that the ROE for Disney is improving they are receiving more income per dollar on their equity from year to year. The ratios for Disney in regards to Profitability all show that company is doing well from year. Over the three years Disney has been contributing to the profit of the company with its amount of assets compared to its liabilities. Market Value Ratios ●
Price/Earnings Ratio: Disney’s Price/Earnings Ratios from 2010­2012 are as follows: 17.62, 12.48 and 15.18. These decreasing values, regardless of the decrease then increase from 2011­2012 indicates that Disney as a company and improving P/E Ratio. This is how much an investor would be willing to pay for one dollar of reported profits. Because Disney’s P/E Ratio has decreasing values indicates that their Market Value is doing well. DuPont Analysis ROE = Net Profit Margin x Asset Turnover x Equity Multiplier 2012 14.29% = 13.44% x 0.56 x 1.88 2011 12.86% = 11.76% x 0.57 x 1.93 2010 10.56% = 10.41% x 0.55 x 1.84 As the ROE is broken down using the above table, it can be determined that the net profit margin fluctuated toward positive grown over the span of three years. We can also identify the stability of the 10 asset turnover ratio, as they varied only slightly over the years, 0.56 being most recent, an average of the previous two years. The equity multiplier is shown to have increased between the years 2010 and 2011, but then decreased slightly to 1.88 in 2012, yet still higher than in 2010. This analysis helps show how to understand the breakdown of the ROE, leading up to the final percentage of it per year. Analysis of Firm Riskiness While Disney does not face the same types of risks that other corporations do, such as fear of an industry take over by a competitor, they do face other types of risk: ● Maintaining the level of success that the Disney corporation has reached over the years is a top risk for the company. Due to recent U.S. economic conditions, like many other corporations, Disney runs the risk of facing possible profit loss. On the flip side, they may benefit from the conditions, depending on the way that the economy rises or falls. For some of it’s services, it has been noted in Disney’s 2009 SEC filing that there has been a decrease in demand as prices increase. These fluctuations have also resulted in a decrease of demand for the entertainment side of the corporation, as luxuries become less and less of a feasible thing for many families. ● As with many products and services, the corporations that supply them face the risk of it’s consumers simply losing interest, and Disney is no exception to this. While it can be argued that their services are classic or even timeless, there is no way to predict if the public will remain loyal to their current preferences of products. At the same time, Disney’s consumer base is not limited to the United States, and therefore they rely heavily on demand from the rest of the world to continue to engage in business with them. Adaptation of the corporations customer base is vital to Disney’s success, and they have been conscious of how important this is. 11 ● Like the risk that many newspapers, magazines and tabloid companies are facing today, the adaptation to constant changes in technology is crucial to recognize and stay on top of for Disney. Their entertainment branches pride themselves on being able to adapt to these changes, and use them to their advantage as a way to differentiate themselves from competitors. The risk that many companies are facing, such as print going completely digital, is one that Disney faces as well, but that it also has the tools and the staff to continue to progress forward as technology does as well. ● Disney’s customers know what to expect of the corporation, and the company recognizes that straying off the path of their business strategy even the slightest may result in loss of success and/or profitability. While attempting to maintain the integrity of their corporation, Disney continues to face risks and pressures of their competitors in the respect of cable networks. The competition to keep viewers while simultaneously trying to figure out how to outdo other companies who are seemingly offering the same products proves extremely difficult. Audiences will ultimately decide the fate of these companies by using their selections of products as their voices. It can be concluded that Disney, like virtually all corporations, face risk. While technology is rapidly changing and developing these companies must along with it, and the way that Disney is handling it seems almost effortless. Whether it be their efforts to communicate with their consumer base, or the validity of their products, the corporation thrives on keeping up and exceeding expectations. As times 12 change, riskiness does as well. Risks today can make or break major corporations, and while walking the line of taking a chance is risky, it has proven to pay off for Disney. This information can be used to perform valuation while looking deeper into the numbers. As the corporations profits and revenues continue to increase, it can be concluded that Disney’s customers are remaining interested and loyal. Given the current state of the economy, many are struggling to find the means to participate in the products and services that Disney has to offer, but it has not yet proven to harm the corporation to the standard that they will no longer be successful. Beta and Industry While Disney proves to be the leader of the pack when it comes to their entertainment strategies and their domination among other companies, it is also calculated to be a relatively risky stock for investment. That being said, as we’ve discussed, the high risk of investment may also mean a high rate of return. It’s beta is listed differently on several sources, such as 1.32 (Google Finance), 1.21 (Yahoo! Finance), and 1.29 (Reuters), which closely resembles, and in some cases mirrors our calculation of 1.32. Using a risk­free rate of 3.81%, which is the US Treasury bond rate over 30 years as of November 14, 2013, this was the closest rate that resembled a firm having unlimited life. Further, as we discussed in class, we chose to use 5% for a market risk premium which led us to our exact beta answer of 1.32059. After using a regression line to determine this statistic, along with 60 data points, the following table demonstrates the totals. Beta Calculation 13 Firm Valuation Valuation Using Multiples In order to value The Walt Disney Company’s stock, we initially used the valuation using multiples method. This method uses the industry’s P/E ratio and the firm’s Earnings Per Share (EPS) in order to determine the company’s current stock price. We found the Television Broadcasting industry’s P/E ratio to be 10.912 and Disney’s EPS to be 3.1313. Next, we used the formula P/E = Stock Price/EPS and solved for Stock Price, resulting in a current stock price of $36.84. Dividend Discount Model Our second method of calculating Disney’s current stock price was to use the Dividend Discount Model. In order to use this method, we first needed to find the following variables: D1, rE, and g. In order to find rE, we utilized the CAPM model (ri = rf + RPmBi). For the risk­free rate of return (rf), we found the rate of return on a 30­year U.S. Treasury Bond, which was 3.81% as of October 14, 201314. We chose a market risk premium of 5% based on class discussion and because we received a positive stock price at that rate. Finally, we computed beta through a regression analysis of returns Yahoo! Finance. (2013). Industry Center ­ Broadcasting ­ TV. 13 Nov. 2013. Retrieved from http://biz.yahoo.com/ic/723.html 13
Yahoo! Finance. (2013). The Walt Disney Company (DIS). 13 Nov. 2013. Retrieved from http://finance.yahoo.com/q;_ylt=AmC3m2NFDkcVjc1iwJ5M39CiuYdG 14
Bloomberg.com. (2013). United States Government Bonds: US Treasury Yields. 12 Nov. 2013. Retrieved from http://www.bloomberg.com/markets/rates­bonds/government­bonds/us 12
14 using historical stock prices for both The Walt Disney Company13 and the S&P 50015. We then calculated the returns for each of the monthly stock prices for the past five years and ran a regression analysis, from which we determined our beta (x variable coefficient) to be 1.3216. Then, we plugged these variables into the CAPM model to find ri. We found that ri = 3.81 + (5 x 1.32), or ri = 10.41%. Next, we needed to determine g, or the company’s dividend growth rate. First, we found historical growth rates for the past nine years and used the formula D1 = D0(1+g) in order to look at past dividend growth rates17. From this method the growth rates for 2012, 2011, and 2010 were 25%, 50%, and 14%, respectively. The next method was to look up analyst predictions of Disney’s dividend growth rates. Bloomberg estimated that Disney’s 5­year dividend growth rate is 16.47%. Finally, we used the Plowback Ratio and Disney’s ROE (g = ROE([Net Income ­ Dividends]/Net Income)) as another method to estimate g. With this method, we found that the values for g in 2012, 2011, and 2010 were 11.58%, 10.84%, and 8.10%, respectively. Based on these calculations, we estimated that Disney’s dividend growth rate is 16.47% because the first method we used yielded growth rates much higher than that (50% and 25%), and the Plowback Ratio method yielded rates lower than that (11.58%, 10.84%, and 8.10%), so 16.47% is reasonably between the results of those two methods. In addition, we were able to find two reliable sources with the exact same estimate of 16.47%. This growth rate should also be high because Disney is an innovative company that is involved in television and media, and we expect it only to grow in the future. Additionally, Disney continued to grow during the recent recession, displaying how the company is still in high demand and will continue to grow even more once the economy strengthens again. Yahoo! Finance. (2013). S&P 500. 14 Nov. 2013. Retrieved from http://finance.yahoo.com/q/hp?s=%5EGSPC+Historical+Prices 16
Exhibit A 17
Exhibit B 15
15 After calculating ri and g, we were able to solve for D1 using the formula D1 = D0(1+g). We found that D1 = $1.24 because D1 =.75(1+.1647). Finally, we were able to compute the stock price using the formula P0 = D1/(ri­g). In this case, however, we used the economy’s growth rate for g instead of the company’s dividend growth rate. The predicted global economic growth rate over the next five years is 2.8%18. Therefore, we were able to solve for today’s stock price using P0 = 1.24/(.1647­.028), where P0 = $16.29. Calculation of Intrinsic Stock Price Finally, we needed to find a weighted average of the stock price that we received from the valuation using multiples method and the Dividend Discount Model. We decided to weight the price that we received from the valuation using multiples method at 30% of our final stock price and the DDM price as 70% of our final stock price. We chose these weights because the DDM takes into account more aspects of the firm when calculating the stock price, such as the estimated dividend growth rate, its last dividends, the estimated rate of return, and the economy’s projected growth rate. The valuation using multiples method, however, only uses the industry’s P/E ratio and the firm’s EPS, and we believe that more elements of the firm should be considered with valuing its stock. With these weights (P0 = (.3*36.84)+(.7*16.29)), we found an average intrinsic stock price of $22.45. Conclusion & Recommendation After analyzing Disney’s financial statements, firm riskiness and defining the firm’s value in regards to dividends we can see that Disney is overvalued. The market value as of November 16, 2013 was $70.0019, taken from Yahoo! Finance. The intrinsic value that we derived was $22.45 (please reference Calculation of Intrinsic Stock Price). With that being stated, it is clear that on the 18
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The Economist: Intelligence Unit. (2013). Global Forecasting Service. Retrieved from http://gfs.eiu.com Yahoo! Finance (2013). The Walt Disney Company (DIS). Web. 16 Nov. 2013. Retrieved from http://finance.yahoo.com/q?s=dis&ql=1 16 outside Disney is very overvalued and most would think to save their shares and invest in another company. However, Disney itself is a very viable company – it holds the nostalgic element from many generations and most customers are loyal to the Disney brand. Also, Disney does not have a one­framed mind­set, they not only have the fantastic theme parks but also own ABC Family and ESPN20, company’s that may be overlooked by the average investor. Another seemingly important bonus is the fact that during the 2008 recession, The Walt Disney Company was able to stay positive and do well during this time. Although technically overvalued, this is a trusted company with evidence to support. Columbia Journalism Review. The Walt Disney Company. Web. 16 Nov. 2013. Retrieved from http://www.cjr.org/resources/?c=disney 20
17 Appendix Exhibit A Exhibit B 18 19